This means that monetary policy bears the primary responsibility for price stability, whereas fiscal policy is to a greater extent oriented towards long-term stability in government finances. In Norway, the Government Petroleum Fund acts as a buffer against fluctuations in petroleum revenues. This makes the Norwegian economy more robust and in the short term less dependent on oil, at least as long as the government budget is running a substantial surplus. The Government Petroleum Fund is Norway’s most important shock absorber against shifts in the terms of trade. This explains why we have had far greater exchange rate stability than New Zealand or Australia. For the past 15 years, cyclical trends in Norway have been desynchronised in relation to other European countries. Because of the stagnation in the 1990s, inflation has been particularly low in Europe in recent years. Norway, on the other hand, experienced a long period of economic expansion in the 1990s. Since 1997, price inflation in Norway has been higher than in the euro area countries. This is reflected in the higher level of interest rates in Norway compared with the euro area. Even if instruments are oriented with a view to stability in the krone exchange rate against the euro, cyclical differences will result in inflation differentials between Norway and euro area countries. This year we have seen a tendency for the krone exchange rate against the euro to be strong at times.
From that time, daily and monthly variations in the krone exchange rate show that the krone is floating. Our analyses suggest that oil price fluctuations are just one of several contributory factors behind the variation in the krone exchange rate in recent years.4 In the short term the krone exchange rate is also affected by uncertainty in the global economy and turbulence in international financial markets. The Exchange Rate Regulation - which is the mandate assigned to Norges Bank by the political authorities - states that monetary policy shall be aimed at maintaining a stable krone exchange rate  4  See Bernhardsen and Røisland (2000). 7  BIS Review 105/2000  against European currencies. Since 1 January 1999, Norges Bank has defined European currencies as the euro. The Exchange Rate Regulation takes into account that the krone exchange rate may remain outside its normal range. In the event of significant changes in the exchange rate, Norges Bank shall orient instruments with a view to returning the exchange rate over time to its initial range. The concept “significant changes” is not quantified. The term must be given an economic content. Norges Bank considers an exchange rate change to be significant if it influences expectations concerning price and cost inflation to the extent that the change in the exchange rate may become self-reinforcing.