The government’s motive for saving resembles the motives underlying saving in pension funds and life insurance companies. Among the government’s saving vehicles, investments in the National Insurance Fund and the Government Petroleum Fund are best adapted to this motive for saving. For both funds, there is a clear division of responsibility between the manager and the government, with the Ministry of Finance as owner. In the case of the Petroleum Fund, Norges Bank’s mandate is to achieve the highest possible financial return in keeping with the strategy and risk limits established by the government. The Fund’s investments are distributed among many countries and spread among a large number of equities and bonds. At end-2000, the Fund had invested NOK 153 billion in about 1800 companies in 21 countries, while NOK 234 billion had been invested in bonds in 18 countries. All ownership interests are now less than 1 per cent of the companies’ total value. A turnaround in one country or a region, which in isolation may be pronounced, will not have a major effect on the total value of the Fund. The value of the Fund’s equity portfolio will therefore shadow developments in prices on international stock exchanges. There is a substantial element of risk diversification, although we are not immune to the risk associated with the uncertainty in global developments. Along the same lines, the return on bond investments will reflect international interest rate developments. The Government Petroleum Fund is built up through transfers of petroleum revenues that are not used domestically.
A prolonged period of even lower interest rates would increase the risk that debt and asset prices will be driven up to levels that are unsustainable over time. We thus obtain a smoother interest rate path when we also give weight to the other two criteria. The criteria and loss function reflect the Bank’s reaction pattern in the period following the financial crisis. We are responding to new insight and lessons learned. The loss function is a mathematical illustration and must be regarded as a simplified representation of the more extensive assessments underlying interest rate decisions. Interest rate setting is based on the Executive Board’s assessment, not a model calculation. Mathematics and models can, however, clarify the alternatives. There is considerable uncertainty as to the effect of low interest rates over extended periods on risk-taking behaviour and the buildup of financial imbalances. 7 In this regard, we are in quite uncharted waters. How financial imbalances build up is not explicitly considered in the analytical apparatus. Work is in progress both in Norway and internationally to further develop the economic models used in monetary policy analysis. As we gain new insight and gather experience, our assessments of economic relationships may change. This will also influence the formulation of our models. 7  Monetary Policy Report 1/12, box on pages 15–16, Norges Bank, and “Norges Bank’s new monetary policy loss function – further discussion”, Snorre Evjen and Thea B. Kloster, Norges Bank Staff Memo 11/2012.