If wage growth were as low as the level achieved partly through incomes policy in the mid1990s, and other things being equal, the interest rate would probably have to be set in such a way that the krone would fall in value in order to bring inflation up to 2.5%. Lower wage growth will also, other things being equal, provide room for higher production in the public sector within the fiscal policy guideline. Inflation and the output gap Percentage price rise and output gap as a percentage of trend GDP  20 15 10  Consumer price inflation  5 0  Output gap -5 1970  1974  1978  1982  1986  1990  1994  1998  2002  Sources: Statistics Norway and Norges Bank JB 7. februar 2003  Relationships in monetary policy Exchange rate Norges Bank's interest rates  Consumption Investment  JB 7. februar 2003  Imported price inflation  Consumer price inflation  Employment Output  Wages and margins  Effects of a 1 percentage point increase in the interest rate over 2 years. Percentage change in mainland GDP 0 -0 .2 5 -0.5 -0 .7 5 -1 Year  -1 .2 5 1  2  3  4  Source: Norges Bank JB 7. februar 2003  Effects of a 1 percentage point increase in the interest rate over 2 years.
Percentage points 0 .2 0 .1 -0  Year 1  Year 2  -0 .1 -0 .2 -0 .3 -0 .4 -0 .5 -0 .6 Source: Norges Bank JB 7. februar 2003  Sub-index model  RIMINI  RIMINI  Year 3  Isolated effect on consumer price inflation of a persistent rise in labour costs of 1 percentage point 0 .8  Year 4  Year 3  0 .6 Year 2  0 .4 Year 1  0 .2  0 Source: Norges Bank JB 7. februar 2003  Annual wage growth1) and unemployment2) Per cent  1 0 .0 8 .2 7 .7  8 .0  10  Unemployment 6 .2  5 .8  6 .0  5 .1 4 .4  4 .0 2 .9  2 .7  8  Annual wage growth  6 .7  3 .0  5 .3  5 .5  5.83)  6  4 .3 3 .1  2 .9  3 .2  3 .6 3 .1  2 .0  4 2  0 .0  0 1 9 93 1 9 94 1 99 5 1 99 6 1 99 7 19 9 8 19 9 9 20 0 0 2 0 0 1 2 0 0 2  1) Average for all groups. Including costs of additional vacation days 2) Registered unemployed and persons on labour market programmes.