Our role in the world market for oil exports is more modest. Back in the 1970s, policymakers’ handling of the newly discovered petroleum wealth got off to a rather weak start. Public spending surged before export revenues had started to kick in. Fiscal policy fuelled a boom and had to be reversed and tightened. By the late 1970s, Norway was in the midst of a deep recession. In the mid-1980s, the Norwegian economy experienced a new boom, this time fuelled by private debt growth. After the fall in oil prices in 1986, we experienced a collapse in housing prices, as well as a severe banking crisis and a soaring public deficit. The turbulence made clear how vulnerable a small open economy is to terms of trade disturbances. The downturn in the early 1990s was the deepest that Norway had experienced since World War II. The authorities realised that the old policy framework was no longer suitable. With a globalised economy and deregulated credit and capital markets, our economy was more vulnerable to external shocks than before. A number of major reforms were implemented to improve cost competitiveness and boost growth. And the establishment of the oil fund in 1990 and the reform of the monetary policy framework in 2001 made the economy more robust to external shocks. Chart: Norwegian exports The need for a robust policy framework is greater than ever: Petroleum products now make up more than 50 percent of exports, and – more recently – oil services exports have also picked up.

Ideally, our response pattern is reflected in market interest rates as soon as economic news arrives, enhancing the effectiveness of monetary policy. And we do indeed find that market expectations tend to react to economic news largely in line with the Bank’s response pattern. We also find evidence of reduced volatility in market interest rates on the days interest rate decisions are announced, compared to the period before the introduction of the interest rate forecast. This suggests that a more precise communication of policy intentions has improved market participants’ understanding of the central bank’s response pattern.9 The contingency of the forecasts seems to be well understood. 7  The monetary policy loss function is described in e.g. http://www.norges-bank.no/en/about/published/publications/monetary-policy-report/1/ p.15. In March 2012, the operational loss function was revised in order to make Norges Bank’s consideration of financial stability when setting the key policy rate more explicit. 8  For further comments on the Norwegian framework, see also Lars E.O. Svensson (2011): “Inflation Targeting”, Chapter 22 in Benjamin M. Friedman and Michael Woodford (eds. ), Handbook of Monetary Economics, Volume 3B, Amsterdam: North-Holland in an imprint of Elsevier, 2011. 9  See Holmsen, Amund, Jan F. Qvigstad, Øistein Røisland and Kristin Solberg-Johansen (2008): “Communicating monetary policy intentions: The case of Norges Bank”, Norges Bank Working Papers 2008/20. See also Taylor, John. B. (2010): “The Transparent Effect of Foreign Interest Rates on Central Bank Decisions”, 26 September, in his blog Economics One, http://johnbtaylorsblog.blogspot.no/2010/09/transparent-effect-of-foreign-interest.html.