Source: Bloomberg and Norges Bank  Monetary policy had to play a substantial role in the wake of the financial crisis. Fiscal space was already limited in many countries and narrowed further through the crisis. Fiscal policy is still constrained. The public sector has done little to deleverage. At the same time, the interest rate level is low and there is very little margin for further cuts. There is less latitude to counter another downturn in the near future. Monetary policy – lessons from the financial crisis Ten years of historically low interest rates and large-scale asset purchases give cause for reflection. An important question is what responsibilities should rest with a central bank. A related theme is what is meant by the objective of low and stable inflation. Let me take a closer look at these questions. The primary objective of monetary policy is to maintain monetary stability, which ensues from the central bank’s responsibility for the monetary system. Behind traditional currencies stands a central bank assigned with the mission of maintaining confidence in the value of money. This is in stark contrast to the so-called cryptocurrencies. They fail the crucial test that a means of payment must pass. 10 Rachel, L. and T. D. Smith (2015) “Secular drivers of the global real interest rate”, Bank of England Staff Working Paper No. 571. 11  Both too high and too low inflation have undesired consequences, such as arbitrary wealth redistribution, underinvestment and resource misallocation that may leave resources idle.
Since then, the value of the fund has risen to almost three times mainland GDP. The value of the fund is now around NOK 8 000 billion (Chart 16).12 Its assets are invested abroad in equities, bonds and real estate. With the substantial capital accumulated in the fund, Norway has become a major investor in the global capital market. Chart 16 Government Pension Fund Global. In billions of NOK. To 2017 Q3 10000 Government’s net cash flow Return Krone exchange rate  8000  Economic perspectives 15 february 2018  10000 8000  Non−oil budget deficit 1) Value of fund  6000  6000  4000  4000  2000  2000 0  0  –2000  –2000 1998  2001  2004  2007  2010  2013  2016  1) Including discrepancies attributable to accounting differences between the central government accounts and Norges Bank’s financial statements. The cumulative discrepancy varies between NOK 5 billion and NOK 41 billion. Sources: Ministry of Finance and Norges Bank  During periods of substantial oil and gas revenues, large capital transfers have been made to the fund. The government’s total net cash flow from petroleum activities comes to around NOK 5 000 billion. The return on the fund has been solid. The cumulative return amounts to more than NOK 3 800 billion.13 Since 2014, the krone depreciation has also contributed to the considerable increase in the value of the fund in krone terms. This does not, however, affect the fund’s international purchasing power.