A situation whereby we shift from fiscal policy guidelines that aim at neutrality to a long-term, gradual phasing in of petroleum revenues, while maintaining nominal stability, will entail some adjustment mechanisms that will be controversial. This applies not least to the effects on Norway’s industry structure. Increased spending over government budgets and/or reductions in direct and indirect taxes will result in an increase in total domestic demand. A substantial portion of this increase in demand will be focused on private and public services. The sheltered sector will have to lay claim to a higher share of available labour. In an economy with full capacity utilisation, this can in practice only take place if resources are transferred from the exposed to the sheltered sector. Independent of the phasing in of petroleum revenues, employment in the sheltered sector is expected to rise in the period ahead. It is not difficult to imagine that the phasing in of petroleum revenues will amplify this trend. The expected reduction in manufacturing employment will be amplified with an increased use of petroleum revenues. Adjustments may come about through deteriorating competitiveness and profitability in internationally exposed industries. Monetary policy cannot influence these adjustments in the long term. In the short and medium term, however, a monetary policy reaction may still have temporary effects on developments in the real economy. The phasing in of petroleum revenues may swiftly translate into pressures on economic resources, which in turn may generate pressures that lead to higher domestic wage and price inflation.
And it will be most relevant to look at such an adjusted index when we wish to evaluate the success of monetary policy. The guidelines for monetary policy may be formulated as follows: If it appears that inflation will be higher than 2½ per cent with unchanged interest rates, the interest rate will be increased. If it appears that inflation will be lower than 2½ per cent with unchanged interest rates, the interest rate will be reduced. There is symmetry here, so for us, it is just as important to avoid an inflation rate that is lower than 2½ per cent as it is to avoid an inflation rate that is higher than 2½ per cent. BIS Review 7/2002  1  A number of factors influence the interest rate’s effect on demand and inflation. These include debt and assets in the private sector, capacity utilisation rate in the economy, the situation in the foreign exchange market, the expected duration of a change in interest rates and the formation of expectations. 1  We have analysed the effect of a change in the interest rate in the light of different scenarios. The chart summarises these analyses and shows the range of outcomes for the effects of an interest rate increase on inflation. An interest rate increase of one percentage point over two years is estimated to curb inflation by 0.20-0.35 percentage point after two years, and by 0.30-0.40 percentage point after three years. GDP growth will be reduced by 0.25 percentage point the first two years.