Relative to GDP, the government bond market is much smaller and less liquid than in many other countries, with a large proportion of foreign owners. If Norges Bank had conducted an asset purchase programme in Norway, it is unlikely that foreign investors would have considered other Norwegian securities. Many investors would probably have moved the money from the sale out of Norway. This could have stimulated the economy through a weaker krone exchange rate, but what the extent of the exchange rate reaction would be is highly uncertain. The introduction of a government bond purchase programme in Norway could also lead to market disruptions. This cost must be taken into account. A further reduction in the number of outstanding bonds would reduce liquidity in a market that is already small. Instead, Norway’s economy requires other solutions. Foreign central banks have also provided extraordinary loans to banks and purchased bonds backed by residential mortgages (covered bonds). We associate such instruments with financial market turbulence. In periods of considerable turbulence and high financial market risk premiums, these instruments can reduce banks’ funding costs and increase the predictability of banks’ funding. The purpose is to prevent an abrupt fall in credit growth from increasing the risk of a severe economic downturn or having an adverse impact on an already weak economy.
Chart: The real interest rate minus the neutral real interest rate However, both in 2004 and following the financial crisis in 2008, the real interest rate was almost 2 percentage points lower than the estimated normal interest rate, with a somewhat larger gap after the fall in oil prices in 2014. Looking back, we can safely say that the Norwegian economy fared relatively well through these downturns, with some help from other factors. After the financial crisis, high oil investment cushioned the downturn, and in 2014 a weaker krone gave the economy an extra boost. In addition, fiscal policy provided substantial support in both cases. A future severe downturn could have a greater impact, with more pronounced declines in both employment and inflation. We must therefore take into account that situations could arise that require measures other than cutting the policy rate towards zero. So we should examine the contents of the monetary policy toolkit in Norway and ask not only when the tools should be used, but also how far the limits of monetary policy should be stretched in such a situation. The policy rate The policy rate is the key monetary policy instrument. Monetary policy is effective when changes 2/9  BIS central bankers' speeches  in the policy rate pass through to market rates. Monetary policy is more effective when central banks successfully influence interest rate expectations. A downturn in the Norwegian economy should initially be countered by lowering the policy rate.