Norges Bank’s mandate states the following: "Monetary policy shall be aimed at stability in the Norwegian krone’s national and international value, contributing to stable expectations concerning exchange rate developments. At the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment.” "Norges Bank’s implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. The operational target of monetary policy shall be annual consumer price inflation of approximately 2.5 per cent over time.” The first paragraph of the mandate sets forth its intentions. The last paragraph specifies what Norges Bank is required to do. The first sentence in the mandate refers to the value of the krone. Stability in  5  For a more detailed discussion, see PSG memo prepared by Røisland and Sveen, Norges Bank’s Research Department: PSG memo No. 7, 2002. 6  See Akram, Qaisar Farooq (2000): “When does the oil price affect the Norwegian exchange rate?” Working Paper 2000/08, Norges Bank. 7  See Akram, Qaisar Farooq (2002): “PPP in the medium run despite oil shocks: The case of Norway.” Working Paper 2002/04, Norges Bank. BIS Review 2/2003  5  the internal value of the krone implies that inflation must be low and stable. The sentence also states that monetary policy shall be aimed at stability in the external value of the krone. The krone exchange rate fluctuates from day to day, from week to week, and from month to month.
On the other hand, the outcome of last year’s wage settlement, and the debate that followed, indicate that the social partners have not yet internalised the monetary policy response pattern ensuing from 3 the mandate laid down by the Government and the Storting. Exchange rate developments The krone has appreciated considerably since summer 2000. There may be many reasons for this. Relationships in the foreign exchange market are unstable. There are nevertheless some fundamental forces that influence the krone exchange rate. The phasing in of petroleum revenues and the economic situation affect the exchange rate. In addition, the real exchange rate has a tendency to return to its normal level if there are substantial deviations over time. Moreover, the krone can be influenced by shifts and changes in wage formation, and the krone exchange rate can also be affected by external factors. Increased spending of petroleum revenues or expectations of increased use of petroleum revenues may lead to an appreciation of the krone. Increased use of petroleum revenues over the central government budget implies higher demand. The contest for economic resources will then result in a further scaling back of internationally exposed industries to make room for more sheltered activities. With low and stable inflation, this restructuring might take place as a result of a stronger krone exchange rate. Such exchange rate movements will typically come in waves. As petroleum revenues are being phased in, the real interest rate will tend to rise. The real exchange rate may appreciate, which means deterioration in competitiveness.