Higher demand leads to higher output and employment. Wage growth may pick up. Higher wage growth combined with higher profit margins will result in higher inflation. Lower interest rates normally lead to a depreciation of the krone. Imported goods then become more expensive and inflation accelerates. Expectations play a key role in price and wage formation, and they are influenced by the interest rate. Expectations concerning inflation and economic stability have considerable impact, not least in the foreign exchange market. Petroleum activity constitutes an important part of the Norwegian economy. Oil gives us an economic base that is not available to many other countries. At the same time, the extent of, and fluctuations in, petroleum activity pose a challenge to economic policy in Norway. In a long-term perspective, Norway’s petroleum wealth is to be distributed across generations. The authorities must therefore exercise fiscal discipline, taking into account long-term considerations. In the short term, the substantial capital revenues from the petroleum sector must be managed in such a way that they do not amplify cyclical fluctuations. The Government Petroleum Fund was established in 1990 with a view to safeguarding long-term considerations in the use of petroleum revenues. The idea behind the Petroleum Fund is that the cash flow from an increase in oil prices should accrue to the Fund and be invested abroad and that the increase in oil prices should not affect the wider budget. As a result, the increase in the cash flow does not affect the domestic economy.
Philipp M Hildebrand: Financial Stability and Hedge Funds: Effective and Ineffective Supervision Speech by Mr Philipp M Hildebrand, Member of the Governing Board of the Swiss National Bank, Diskussionsforum «Nachbarn Deutschland-Schweiz: Impulse für die Zukunft», Berlin, 9 November 2005. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). *  *  *  The hedge fund industry has grown rapidly over the past few years and it has become an important segment of global financial markets. The possibility to use leverage and a high degree of flexibility are key elements of a broad range of investment strategies which have made the hedge funds industry very profitable. Hedge funds have been an important source of innovation in the traditional asset management industry and they have rendered financial markets more liquid, more efficient and more flexible. Nonetheless, the rapid growth of the industry and the excessive use of leverage may result in potential systemic risks which are relevant to central banks, unlike prudential matters. Overall, industry leverage is difficult to measure. However, several studies suggest that it is lower than at the time of the near collapse of LTCM in 1998. Even so, temporary excessive levels of leverage with single hedge funds can not be ruled out completely. A crisis in the hedge fund industry might therefore spill over to their primary trading partners, the major investment banks.