Mr Gjedrem reports on the Norwegian economy and monetary policy in Norway  Speech given by Mr Svein Gjedrem, Governor of the Norges Bank, at the Royal Norwegian Embassy, in London on 28 October 1999. * 1. *  *  Introduction  Ambassador, ladies and gentlemen, I am happy to have this opportunity to speak to you about monetary policy in Norway. What happens in the financial community in London is important to the Norwegian economy: the financial markets here provide substantial loans for Norwegian firms, and are at the same time an important recipient of Norwegian financial investments. Short-term capital movements between United Kingdom and Norway are also important. Against this background, I would like to share with you information about the Norwegian economy. My focus will be on explaining distinctive aspects of the Norwegian economy, which is based largely on a limited number of commodities. My hope is that this understanding may help market operators to make informed decisions when dealing with Norwegian markets. 2. Background  Trend GDP growth in the Norwegian mainland economy is about 2–2¼%, and the inflation rate is around 2%. GDP per capita is slightly higher than in most other European countries. The high level of per capita income is partly a result of extensive revenues from oil and gas extraction. These revenues also allow Norway to operate with a substantial current account and government budget surplus. Extraction of North Sea oil started in the 1970s, and the production volume has increased over the years.
Fiscal policy has been fairly well adapted to the economic situation over the last decade. The active role it has played in demand management has functioned as an anchor for fiscal discipline. The Government Petroleum Fund is meant to be a buffer against changes in the terms of trade. In other countries this role must be filled by the exchange rate. Chart 12 How does the Norwegian regime differ from inflation targeting? • Co-operation: – Tradition of co-operation between political authorities and social partners – Wage-setting considering employment effects  • Fiscal policy: – Fiscal policy has financial leeway for stabilisation policy – Petroleum Fund buffer against terms of trade variability, not the exchange rate  • Monetary policy: – Different formulation of target – Different institutional setting Legg inn filadresse her  •  Monetary policy in Norway is oriented towards stability of the exchange rate and not an explicit inflation target. The setting of interest rates will more or less be the same. Norges Bank focuses on keeping a low rate of inflation and on avoiding a situation in which monetary policy in itself contributes to a recession that may threaten the fundamental conditions for stability of the krone. •  The institutional set-up for monetary policy in Norway is different. In a country with inflation targeting, the central bank will inform the political authorities if the inflation target is not met.