Svein Gjedrem: Norwegian monetary policy  Speech by Mr Svein Gjedrem, Governor of the Norges Bank, held in Copenhagen on 17 November 2000. *  *  *  Introduction I am happy to have this opportunity to speak to you here in Copenhagen about trends in the Norwegian economy and about Norwegian monetary policy. Norway’s choice of monetary policy regime is closely linked to the structure of the Norwegian economy. Norway is a welfare society with a large public sector, a high level of transfers to households and enterprises and high direct and indirect taxes. Our economy is also characterised by the great significance of petroleum activities. We have a growing aquaculture industry, and our manufacturing is also partly resource-based. The engineering industry - which is substantial - is partly based on petroleum activities. The exposed sector of the mainland economy has been fragile and vulnerable. A key concern in economic policy since the 1970s has been to avoid undermining the exposed sector too much, in view of our desire to avoid becoming too dependent on petroleum revenues. In this address I will discuss the relationship between the special structure of the Norwegian economy and Norwegian monetary policy. I will attempt to shed some light on certain differences between the Norwegian and Danish economies, and how these differences have influenced the formulation of monetary policy. Background  Oil production started in the early 1970s and has gradually increased. Forecasts show that production will peak in 2002, and thereafter decrease gradually.
Long-term fixed-rate financing is far less common in Norway than in Denmark, for instance for financing dwellings. As a result, interest rate changes have a greater impact in the relatively short term. However, the strong impact of the interest rate also places constraints on its use to underpin the exchange rate. The situation in Denmark, with its well-developed bond market, is somewhat different, since here the short-term interest rate has rather less pronounced effects on the real economy and prices, and can therefore be used to a greater extent to underpin the exchange rate. Consequently, a monetary policy strategy in which interventions are used to influence the exchange rate will have greater credibility, and the risk of ending up in game situations with the market is smaller than in Norway. Norges Bank does not intend to act in a way that will prompt game situations. The bank may nevertheless use interventions to a limited degree if the exchange rate moves significantly out of line with what we consider to be reasonable on the basis of fundamentals or in the event of exceptional short-term volatility in thin markets. In such circumstances, there is less risk of ending up in a game situation against exchange market operators. We have also experienced game situations in which one or more major operators were behind the krone exchange rate fluctuations at the same time as they took speculative positions in the bond market in the expectation that Norges Bank would raise its key interest rate to defend the krone.