Svein Gjedrem: A central banker's comparison of the Nordic countries
Introduction by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the panel
discussion of the ACI Nordic Congress, Göteborg, 24 August 2002.
Please note that the text below may differ slightly from the actual presentation.
* * *
For outsiders, it may be convenient to see the Nordic region as consisting of countries with very similar
characteristics. However, the countries are different in several ways.
First, they differ in their relations to the EU and with respect to their monetary policy regimes. Sweden,
Denmark and Finland are members of the EU. Finland is also a member of EMU. The euro has
replaced the markka as legal tender, and Finland and the other 11 member countries of EMU have a
common monetary policy. Denmark is in ERM II while Sweden, Iceland and Norway have inflation
targets.
In Norway the inflation target of 21⁄2 per cent was adopted on 29 March 2001 and now functions as the
nominal anchor for the Norwegian economy. The introduction of the inflation target did not imply a
significant shift in the way monetary policy was conducted. However, the introduction of the inflation
target brought monetary policy in Norway more in line with common practice internationally, and
facilitated communication.
Although the approaches differ, inflation has been relatively low and stable in the Nordic countries in
recent years.
Second, the Nordic countries are different in terms of industrial structure. The sector composition of
the three Scandinavian stock exchanges provides an illustration. The Oslo Stock Exchange is heavily
dominated by the energy sector, which is practically absent in Stockholm, Copenhagen and the two
other Nordic exchanges. Norway has small traditional industries, but the IT and telecom sector is
comparable to the other countries' in relative size. The different sector composition of the stock
exchanges also illustrates the potential for diversification by investing across the Nordic countries. The
differences in industrial structure imply that international economic developments will affect the Nordic
countries differently. Most notably, an oil price shock will have the opposite effect in Norway than in
the other Nordic economies.
In 2001, the petroleum sector in Norway accounted for around 20 per cent of total investments, 45 per
cent of exports, 24 per cent of GDP and 35 per cent of central government revenues. The government
net cash flow from the petroleum sector has increased in recent years. Since 1995, the fiscal surplus
has been invested in the Government Petroleum Fund. The size of the Fund has increased rapidly in
the last few years, and will reach close to 100 per cent of GDP towards the end of this decade,
according to estimates from the Ministry of Finance. By investing a substantial part of petroleum
revenues abroad, the Government Petroleum Fund limits the effect of the current account surplus on
the exchange rate.
GDP growth in Norway has been relatively high since 1990, also when excluding the petroleum sector.
GDP for Mainland-Norway has on average increased by 2.8 per cent annually since 1990. This
compares to 1.7 per cent in Sweden, 2.1 per cent in Denmark, 1.9 per cent in Finland and 2.5 per cent
in Iceland over the same period. The differences for average GDP growth since 1995 are somewhat
smaller.
Although GDP growth in Norway was moderate in 2001, capacity utilisation in the Norwegian economy
remains high. So far, the impact of the international slowdown on the Norwegian economy has been
limited, partly due to high oil prices. Unemployment has been low since the mid-1990's. Private
consumption is expected to remain buoyant due to high wage growth and an expansionary fiscal
policy in the years ahead. Prices for domestically produced goods and services are rising fast. Inflation
in Norway is being dampened by a close to zero rise in prices for imported consumer goods.
The different cyclical developments in Norway are also reflected in the stock market. Norwegian stock
prices have become much less correlated with world markets over the last years. The correlation is
considerably lower than in the other Nordic countries. The correlation for Denmark is also rather low,
but this is partly due to low exchange rate correlation. When looking at the correlations using national
currencies, the Danish correlation is higher and more in line with that for Sweden and Finland.
Iceland and Norway have the highest key interest rates among the Nordic countries, at 7.9 and 7.0 per
cent respectively. Rates are considerably lower in Sweden (4.25), Denmark (3.50) and Finland (3.25).
Wage developments over the last few years can contribute to explaining the differences. In Norway
wage growth has been high over the last five years, reflecting a tight labour market. Looking at data for
wage growth from the OECD, the ranking of interest rate levels in the Nordic region corresponds to the
ranking of average wage growth since 1998.
The Norwegian krone has appreciated by around 15 per cent since mid-2000. Seen over a longer
period, the krone has been rather stable. The present level is only around 6 per cent stronger than in
1990. Over this longer period, other Nordic currencies have shown larger fluctuations.
Over the last two years, the appreciation of the Norwegian krone has been driven by the wide and
increased interest rate differential between Norway and other countries. The interest rate differential
reflects high growth in wages and aggregate demand in Norway. There is thus a clear link between
cost pressures in the Norwegian economy and the exchange rate. The link works through interest rate
expectations driving the krone upwards. The appreciation of the krone has a dampening effect on
inflation. At the same time, profitability in the internationally exposed sector is under pressure both due
to higher wage costs and the appreciation of the krone.
But the krone can move in both directions. It will not appreciate indefinitely. If the krone follows the
path of the forward rate, it will depreciate in the years ahead. The forward effective krone exchange
rate two years ahead is close to the average level of the effective exchange rate during the 1990s.
Nordic countries - institutional differences
EU membership Monetary policy regime
Inflation target of 2 per cent
Yes
Sweden
(+/- 1 percentage points)
Yes ERM II
Denmark
Yes Member of EMU
Finland
No
Inflation target of 21⁄2 per cent
Iceland
(EEA agreement)
No
Inflation target of 21⁄2 per cent
Norway
(EEA agreement)
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Sector composition of NOREX exchanges.
June 2002
100 %
90 %
80 %
70 %
60 %
50 %
40 %
30 %
20 %
10 %
0 %
Stockholm Copenhagen Oslo
Industrials and materials IT/Telecom Consumer goods and services
Financial services Energy Other
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Government net cash flow from the petroleum sector and
total capital in the Government Petroleum Fund.
Per cent of GDP
120 120
90 90
Total capital (end of year)
Net cash flow
60 60
30 30
0 0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Ministry of Finance. RNB 02
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BIS Review 47/2002 3
GDP Mainland-Norway and employment.
Percentage change from previous year
8 8
7 7
GDP Mainland Norway
Employment
6 6
Average 1990-2001 = 2.8%
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
-2 -2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: Statistics Norway
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Correlation with world index.
USD based price indexes
1
0,8
Dec 93 - 1997
0,6
1998-2002
0,4
0,2
Denmark Finland Norway Sweden
Source: EcoWin / Financial Times
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Key interest rates in the Nordic countries
12,0 12,0
11,0 11,0
Iceland
10,0 10,0
9,0 9,0
8,0 8,0
Norway
7,0 7,0
6,0 6,0
Denmark
5,0 5,0
4,0 4,0
3,0 Sweden 3,0
Finland (EMU)
2,0 2,0
1999 2000 2001 2002 2003
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Nominal effective exchange rates
January 1990=100
130 130
Appreciation
120 120
Iceland (January 1997=100)
Denmark
110 110
Norway
100 100
90 Sweden 90
80 80
Finland
70 70
Depreciation
60 60
90 91 92 93 94 95 96 97 98 99 00 01 02
Source: Bank of England and Central Bank of Iceland
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BIS Review 47/2002 5
Norway: Effective exchange rate and 12-month
interest rate differential against trading partners
4,0 93
3,5 96
3,0 99
Interest rate differential (12 months)
(left-hand scale)
2,5 102
2,0 105
Effective exchange rate
1,5 108
(right-hand scale)
1,0 111
jan.99 jul.99 jan.00 jul.00 jan.01 jul.01 jan.02 jul.02
Source: Norges Bank
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Norway: Effective exchange rate
90 90
95 95
100 100
105 105
110 110
Forward exchange rate
(UIP)
115 115
1990 1992 1994 1996 1998 2000 2002 2004
Source: Norges Bank
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