Although many central banks have cut their policy rates to almost zero, the expansionary effect of this has consequently not been as strong as could have been desired. In addition, the more serious the financial crisis becomes, the more poorly the financial markets function. This, in turn, means that monetary policy becomes less effective, that is to say that changes in the policy rate have less effect on the economy than is normally the case. Developments in the present crisis provide a good illustration of this phenomenon. Many central banks have experienced that changes in the policy rate have not at all had the same effect on demand that they have normally. In other words, the transmission mechanism between policy rate and the real economy has ceased to function normally. During the crisis, parts of the world were affected by an acute credit crunch, entailing that fully creditworthy companies encountered difficulty in obtaining credit due to a lack of capital in the bank sector. This, if anything, has been characteristic for this crisis, having clear consequences for the real economy, including the heavy decline in world trade. The credit crunch came to be and to remain a monetary policy problem in many countries as the supply of credits frequently became more or less insensitive to interest rate changes. In Sweden, we only saw the merest hint of such a credit crunch.
A one dollar increase in the oil price gives an increase in GDP of almost 1% and most of it arrives as increased budget revenues. With large and varying budget revenues, the basis for determining central government expenditure and taxes from one year to the next may easily be impaired. If budget expenditure is allowed to fluctuate in step with oil prices, the result may be abrupt shifts and instability in the Norwegian economy. Changes in oil prices may then quickly influence wage and price expectations, the exchange rate and long-term rates. In that case it will be very demanding to achieve nominal stability. Short-term interest rates would have to be changed frequently and sharply and would generally reflect a high risk premium for the Norwegian krone. It is therefore important that the annual budgets are anchored in a long-term strategy that takes into account that oil revenues may fluctuate from one year to the next. In addition, it is advantageous if fiscal policy can be used to counter fluctuations in demand and production. Final words By hosting this workshop, we hope to take part in an exchange of new knowledge about the conduct of monetary policy. We hope that the workshop will be a fruitful experience for both researchers and monetary policymakers. 3  BIS Review 101/2000