For example, the fact that the credit rating agencies bestowed their highest ratings on certain securities prior to the crisis meant that many investors assumed that the securities were “informationally insensitive.” What was subsequently learned, however, was that instead of being robust to economic developments, structure of the securities had merely served to concentrate the systemic “tail risk” in the securities.   New financial products are often associated with the extension of primary credit to previously underserved sectors of the economy. This extension of credit to the previously underserved often produces abuses or outright fraud, much of which can be masked by the newness and complexity of the products. In many respects these are old lessons that we should have learned already from what occurred in the run-up to previous episodes of financial crisis. However, the remarkable stability of the U.S. economy from the mid-1980s to 2007 unfortunately served to produce what amounted to a collective amnesia with regard to these earlier learned lessons. For example, most macroeconomists had become convinced that the widening and deepening of the financial system over the previous twenty years driven by deregulation, and given additional impetus by the return to low and stable inflation, was an important source for this economic stability. This is not to say that there was no one pointing out the risks of the low risk premiums and the rapid growth of structured investment products, but many economists, analysts and commentators had reached the blissful state of mind that it was different this time.
Suppose that price and cost inflation in Norway were allowed to be higher than in the euro countries. The nominal exchange rate would then have to depreciate in order to keep the real exchange rate constant over time. Thus, stabilising inflation at around the level aimed at by the ECB is a means of achieving exchange rate stability against the euro. In a situation with the prospect of increased inflationary pressure and a depreciating exchange rate, an increase in the interest rate may at the same time bring the exchange rate back towards its initial range and reduce inflationary pressure through lower demand and lower imported goods inflation. This in turn will contribute to long-run stability in the exchange rate. Similarly, with an appreciating exchange rate and a low inflation and activity level in the economy, a lower interest rate will contribute to stabilising the exchange rate in both the short run and the long run through a stable inflation level. On the other hand, we can think of situations where we would need to set a high interest rate in order to keep the exchange rate close to the initial range in the short run, creating a deflationary recession in the economy. Normally, a deflationary recession will lead to a weakened krone exchange rate, which means that the high interest rate set to keep the level of the exchange rate unchanged in the short run in itself will induce exchange rate instability in the long run.