It is nevertheless conceivable that in a situation where a very high rate of inflation is accompanied by sluggish economic growth, Norges Bank may decide to apply a somewhat longer time horizon than two years to reach the inflation target of 2½ per cent. The choice of monetary policy time horizon reflects the fact that there are real economic costs associated with bringing inflation rapidly back to the target. This horizon is thus an indirect expression of the trade-off between the objectives of, on the one hand, stable output, and on the other hand, low and stable inflation. Historical data for Norway and other countries show that interest rate changes affect aggregate demand fairly quickly. Using the RIMINI model, we have estimated the effects of a 1 percentage point increase in interest rates over a period of two years. The chart shows that, in isolation, an interest rate increase of this magnitude may reduce mainland GDP by ¾ -1 per cent after two years. The effect will depend on a number of factors, such as household loan debt and corporate profitability. Household and business expectations may also play a part in determining the impact of interest rates. The band in the chart illustrates some of this uncertainty as shown by our models. In practice, it is often difficult to determine how long the interest rate will be kept at high or low level.
This labour has to be recruited from the exposed sector, or through the natural increase in the labour force finding its way to the sheltered sector. Over time, the size of the internationally exposed sector will be affected by the portion of the petroleum revenues that is absorbed into the Norwegian economy. The size of the internationally exposed sector is independent of monetary policy. An appreciation of the krone may, nevertheless, affect the speed at which changes occur in the business and industry. To maintain balance in the Norwegian economy, the phasing in of petroleum revenues must be countered by a monetary policy stance that is tighter than it would otherwise have been. This may be accomplished by keeping interest rates higher than they would otherwise have been, or by an appreciation of the krone, or both. A clear monetary policy target is a necessary complement to the fiscal guideline with a view to ensuring reasonable macroeconomic stability. Monetary policy is oriented towards low and stable inflation. The inflation target is set at 2½ per cent. BIS Review 66/2002  1  If evidence suggests 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. Inflation in Norway is determined by both domestic and international inflationary impulses. Domestic inflationary impulses are influenced by the state of the Norwegian economy.