Norway has not experienced a pronounced economic downturn since the crisis around 1990, when a cost crisis, an employment crisis with a sharp increase in unemployment and a decline in output, a currency crisis, a fall in property prices and a banking crisis all occurred around the same time. A long upturn followed in the period from 1992 to 2008. National income rose by an annual 5.4 per cent in this period, far higher than the rate of output growth in the mainland economy. Income growth has been higher than in the 1950s and 1960s. 4  BIS Review 15/2010  Behind these favourable developments were the major structural reforms of the 1980s and 1990s that resulted in higher production capacity in the Norwegian economy. The Norwegian business sector experienced a long period of high productivity growth. Shifting forces have otherwise driven the economy – during the crisis around 1990, labour costs decreased to a low level compared with Norway’s trading partners and wage settlements were moderate. In 1995, the cost level was 10–12 per cent below Norway’s average for the oil age from 1970 to today. In addition, real interest rates in Norway fell markedly through the 1990s from high levels. This was because the fixed krone exchange rate regime maintained through the crisis period managed to bring down inflation and inflation expectations. BIS Review 15/2010  5  Moreover, growth in public spending was rapidly reduced once business sector activity had recovered. Norway experienced an economic shift in the 2000s.
Two questions in particular tend to arise: Do we only take into account inflation, or do we also care about the real economy, for instance, the employment situation? And what do we think of the rapid increase in household indebtedness and in property prices? The aims of monetary policy To understand the monetary policy decisions, it is of course essential that there is no uncertainty regarding the objective of monetary policy. There is only one statutory objective for monetary policy and that is to maintain price stability. We at the Riksbank have then chosen to specify this objective in terms of an explicit inflation target. This entails an annual change in the consumer price index (CPI) of 2 per cent with a tolerance interval of ± 1 percentage point. One might ask why we allow a certain measure of inflation when Parliament has given us the task of maintaining price stability. One reason why we have chosen not to set the inflation target at zero is that an inflation target that is too low can under certain circumstances create adverse conditions for employment. There is an inbuilt resistance within the economy to nominal reductions in prices and  1  See “Monetary policy in Sweden", Sveriges Riksbank (this document can be downloaded from the Riksbank’s website, www.riksbank.com, or ordered as a booklet). BIS Review 84/2006  1  wages and a certain measure of inflation can therefore make it easier to implement necessary changes in relative prices and wages.