Jarle Bergo: Monetary policy and its role in economic policy Address by Mr Jarle Bergo, Deputy Governor of Norges Bank (Central Bank of Norway), at the Confederation of Vocational Unions, Oslo, 7 February 2003. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 22 January and on previous speeches. Please note that the text below may differ slightly from the actual presentation. *  *  *  The objective of monetary policy is to ensure nominal stability. There were wide fluctuations in the Norwegian economy in the 1970s and 1980s. Economic developments were marked by high and variable inflation. Inflation accelerated in the beginning of the 1980s and it took a long time before it fell. The absence of a nominal anchor was one of the main reasons behind these pronounced swings in the Norwegian economy. With a policy of low interest rates and devaluations, inflation took root. Nominal interest rates were kept at a low level even though inflation and the value of tax-deductible interest expenditure rose. Frequent devaluations from 1976 were not able to prevent a decline in the manufacturing sector. On the contrary, they proved to be self-reinforcing. The wide fluctuations culminated in a credit boom in the mid-1980s, followed by a deep recession and high unemployment towards the end of the 1980s.
The high level of wage  1  See box in Inflation Report 2000/4: Effects of an interest rate change. 2  See box in Inflation Report 2002/2: How does the krone exchange rate influence the CPI. growth fuelled expectations of continued high interest rates in Norway relative to other countries and appears to have contributed to the appreciation of the krone. The unexpected high level of wage growth required a tight monetary stance. Norges Bank increased its key rate last summer. The interest rate differential against trading partners widened and the krone appreciated. This appreciation also reflected other factors, such as uncertainty in stock markets and higher demand for NOK-denominated assets, which were perceived as a safe investment in an otherwise turbulent period. In the long run, wages must be commensurate with the value added that is generated by workers. Real wage growth is thus determined over time by developments in labour productivity in all sectors of the economy. If historical productivity growth trends persist, the long-term rate of growth in labour costs that is compatible with the inflation target is 4½%. The outcome of the wage settlements we have observed in recent years is not consistent with this. If monetary policy is to have an impact, it is important that wage growth responds to labour market tightness. Since the mid-1980s, wage growth has been markedly higher in Norway than among trading partners.