The Government has indicated in the National Budget that monetary policy should be the first to react when the outlook for the economy changes. A situation may nevertheless arise where an active use of fiscal policy is required, either because capacity utilisation is particularly low, or because pressures in the economy are very strong. Under certain conditions, the interplay between monetary and fiscal policy may fail to function. Interplay functions well when the decision-making bodies recognise that one body's decisions  4  BIS Review 65/2002  influence the decisions of the other. In the absence of such recognition, a decision will not produce the intended result. The economy might move in a highly unfavourable direction, with high interest rates, sluggish economic growth and a deterioration in the state’s financial position. The best contribution Norges Bank can make is to clarify our response pattern within the framework of our mandate. When the response pattern in monetary policy is known and remains unchanged over time, the social partners can also take any monetary policy response into account when wages are being determined. The outcome of this year’s wage settlements, which resulted in average wage growth between 5½ and 6 per cent, may indicate that there is not an adequate anchor for wage formation in Norway. Under the traditional wage formation model, manufacturing industry negotiated first. Wage growth in Norway was to be on a par with wage growth among our trading partners in order to maintain competitiveness.
16 We must continue to safeguard the inflation target, and learn the major lesson from developments in the 1970s and 1980s, namely to ensure to retain the credibility of the nominal anchor. And we must also learn the major lesson from the financial crisis, namely that financial stability is a condition for low and stable inflation and good economic developments in general. The global dimensions of the financial and debt crises affect the conditions for Swedish monetary policy As I mentioned earlier, the Swedish economy, despite good conditions, has been greatly affected by the financial and debt crises. One question that has arisen once again is how much monetary policy in a small, open economy like Sweden’s can deviate from that conducted in other countries. 17 The correlations between Swedish and international (KIX-weighted) GDP growth and inflation since the 1980s are both above 0.8, which indicates that a very large part of the variation in economic activity in Sweden stems from  14  See, for instance, Aiyar, S. Calomiris, C. W. and Wieladek, T. “Does Macro-Pru Leak? Evidence from a UK Policy Experiment”, NBER Working Paper no. 17822, 2012. 15  In my speech here last year I gave a detailed description of my thoughts on monetary policy and macroprudential policy. 16  See also Billi, R. and Vredin, A., “Monetary policy and financial stability – a simple story”, Economic Review 2014:2, for a description of monetary policy and financial stability that reflects this opinion.