4 per cent of the Fund’s value as an annual average through the business cycle. This establishes a clear division of labour among the different components of economic policy. •  Monetary policy steers inflation in the medium and long term and can also contribute to smoothing swings in output and employment. The inflation target provides  BIS Review 139/2007  1  economic agents with a stable basis for their decisions concerning saving, investment, budgets and wages. •  The central government budget – growth in public expenditure – influences the krone exchange rate and the size of the internationally exposed business sector in the medium term. Government expenditure and revenues must be in balance in the long term. •  How well and how efficiently we utilise our labour resources and other economic resources is largely determined by wage formation and economic structures and incentives. When monetary policy anchors inflation expectations, this provides a sound basis for the interplay between monetary policy and other components of the economy. Inflation targeting provides a fixed framework for monetary policy and gives a clear indication of how the central bank is to respond in different situations. The social partners can determine wage growth in the knowledge of the monetary policy response. This system works well whether wages are set at the central, local or individual level.
Growth in the US economy has slackened. The US housing market has weakened and employment is rising at a slower pace than earlier this year. There are also signs of somewhat slower growth in western Europe. Economic growth in emerging economies remains strong, particularly in China. Developments in these countries are of growing importance for the world economy and for our own economy. China, India and Russia have accounted for close to half of overall global growth over the past year. In spite of weaker prospects for the US and western Europe, oil prices have increased since the October Monetary Policy Report and prices for other commodities remain high, partly owing to continued strong growth in demand from Asia. Uncertainty surrounding developments in the world economy has heightened as a result of the turbulence in financial markets this autumn. The turbulence was triggered by problems in some segments of the US housing market. Many borrowers were granted mortgages they cannot service now that the interest rate has risen. There were losses, particularly on loans in the bond market and in complex loan products owned by separate companies that had relied on very short-term financing. These companies are linked to the large international banks, and the banks have had to transfer loans onto their own balance sheets. Combined with higher losses, this limits banks’ capacity to extend new loans to the housing market and other sectors, and will thereby have a dampening impact on economic growth.