figures 2 and 3 in Frankel, Jeffrey A., Carlos Végh and Guillermo Vuletin (2011): “On graduation from fiscal procyclicality”, NBER Working Paper 17619. 6  Chen, Yu-Chin. and Kenneth S. Rogoff (2003): “Commodity Currencies”, Journal of International Economics 60, 133–169, documents that commodity exports have a strong and stable influence on the floating (real) exchange rates of Australia, Canada and New Zealand. Ferraro, Domenico, Barbara Rossi and Kenneth. S. Rogoff (2012): “Can Oil Prices Forecast Exchange rates?” NBER Working Paper 17998 extends the analysis to higher frequency data and out-of-sample forecasting and finds that both contemporaneous and lagged oil prices have significant predictive ability for the NOK/USD-exchange rate and oil prices. BIS central bankers’ speeches  3  Inflation targeting with interest rate forecasting Chart: Inflation When the fiscal rule was introduced in 2001, Norges Bank was charged with the task of keeping consumer price inflation low and stable. The value of the krone exchange rate was allowed to float freely. The operational target of monetary policy is annual consumer price inflation of close to 2.5 percent over time, under a regime of flexible inflation targeting. In the conduct of monetary policy, the aim of reaching the inflation target is balanced against the aim of stabilising output and employment. In addition, monetary policy should be robust by seeking to mitigate the risk of a build-up of financial imbalances. Over the past ten years, average inflation in Norway has been somewhat below, but close to, 2.5 percent.
•  Thirdly, a fund owned by the government must be highly transparent, not only to the Norwegian public but also in an international context. Let me elaborate on these aspects. In the early summer of 2007, the fund’s strategic equity share was raised from 40 to 60 percent. From summer 2007 to 2009, the fund bought equities worth USD 180 billion in international markets, equivalent to 0.5 percent of all globally listed equities. The largest volume of transactions was carried out in the midst of the financial crisis of 2008 and 2009. The long-term horizon also enables us to invest countercyclically, by rebalancing asset classes: If the equity share increases by more than 4 percentage points from the target weight of 60 percent, we will sell equities and buy bonds. Conversely, if the equity share drops below 56 percent, we will sell bonds and buy equities. The capacity to withstand market turmoil was demonstrated during the financial crisis in 2008 and 2009. For a period of 18 months, the fund’s losses totalled roughly USD 120 billion – more than 25 percent of Norway’s GDP. The losses did not go unnoticed. They led to lively public debate on the fund’s investment strategy. However, the conclusion drawn was that the strategy was robust, and the government remained committed to it.10 Norway would have to accept that the fund’s capital would fluctuate, sometimes dramatically, given the high equity share. Indeed, through 2009 and 2010, not only were those losses reversed, but additional gains were also made.