Svein Gjedrem: The labour market, business cycles and monetary policy Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the annual conference for managers of small and medium-sized enterprises (SMB-dagen), Bergen, 27 September 2007. The text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 26 September and in Monetary Policy Report 2/07. *  *  *  Monetary policy is oriented towards low and stable inflation. The operational target of monetary policy is consumer price inflation of close to 2½ per cent over time. The objective of low and stable inflation provides the economy with a nominal anchor. This means that all economic agents – households and enterprises, whether large or small – can plan ahead on the assumption that inflation is, and will continue to be, low and stable. In a small, open and decentralised market economy like Norway, and with our particular industry structure, there will be cyclical fluctuations. When economic agents are confident that inflation will be low and stable over time, the interest rate can also be set with a view to dampening the fluctuations somewhat. The labour market plays an important role in the effect on inflation of the key policy rate, which is the instrument of monetary policy. First, as interest rates rise, household and local government consumption and investment will tend to fall. Lower demand leads to lower output and employment.
Now, the situation has rather been the opposite: comprehensive lending from the Riksbank, but very limited loan losses on the home market for the banks. How can this be explained? Well – as a reflection of the nature of the crisis. Back then, in the early 1990s, the banks had suffered  2  For example, in the euro area, the price index HICP measures inflation without the effects of changes in mortgage interest expenditure. 2  BIS central bankers’ speeches  loan losses in the commercial property sector, which impacted on profitability in the banking sector and led to a degree of restructuring aimed at maintaining capital adequacy; it was a solvency crisis, rather than a liquidity crisis. This time, in conjunction with the financial crisis, an acute shortage of liquidity instead arose in the banks when the functioning of the capital markets became impaired. A further sign that the financial crisis is behind us is that the Riksbank has now wound up all of the extraordinary measures adopted during the crisis. It was not entirely easy to understand the development of the financial crisis while it was unfolding. Today, however, the view is much clearer. This brings us to the question of where we are today. Where are we now? Strong recovery after the crisis The Swedish economy has recovered very strongly from the financial crisis. The growth of GDP in Sweden is very high from both a historical and an international perspective.