Monetary policy steers inflation in the medium and long term and can in addition contribute to smoothing fluctuations in output and employment. The central government budget – growth in government expenditure – influences the real krone exchange rate and the size of the internationally exposed sector in the long term. The fiscal rule – the fiscal policy guidelines – enhances the predictability of petroleum revenue spending in the Norwegian economy even when the budget from one year to the next is used to stabilise economic developments and even when the automatic stabilisers are allowed to operate. A fairly steady phasing-in of petroleum revenues over time curbs the impact on the krone and reduces the risk of abrupt and sizeable structural shifts between the international exposed and sheltered sectors. In this way, the framework contributes to more stable expectations concerning, among other things, developments in the krone exchange rate and competitiveness. BIS Review 60/2009  1  The krone floats and fluctuates somewhat, and has shown a tendency to appreciate in favourable times and fall in value in response to negative shocks. Nonetheless, budgetary policy and the petroleum fund mechanism contribute to stability in the krone. This can be seen clearly when comparing movements in the krone in recent years with currencies of other open economies with substantial exports of raw materials, such as Australia and New Zealand. The economic turnaround in Norway occurred just over a year ago. House prices had started to fall, growth in consumption subsequently came to a halt and housing starts declined.
Pursuant to Chapter 1, § 3 of the Act on Norges Bank and the Monetary System, “the Bank shall inform the ministry when, in the opinion of the Bank, there is a need for measures to be taken by others than the Bank in the field of monetary, credit or foreign exchange policy”. 2  BIS Review 60/2009  On the basis of this provision, Norges Bank, in a letter of 6 October to the Ministry of Finance, took the initiative to establish a swap arrangement. In a letter of 18 December, we also proposed measures to strengthen banks’ solidity. The chart shows events and the measures and proposals at the initiative of Norges Bank. A critical period was the end of September and the beginning of October with the collapse of the investment bank Lehman Brothers, the savings bank Washington Mutual and the insurance company AIG. The extensive measures that have been implemented have worked. The difference between Norges Bank’s key rate and the money market rate – the premium – has narrowed, but is still higher than prior to the crisis. The flow of interbank liquidity appears to have been restored to some extent, but the money market is still segmented and the central bank an important meeting place. Even if premiums in the money market and credit market have been high and volatile, the changes in central bank key rates have fed through to money market rates.