Consumer price inflation in Norway declined sharply, however, through 2003 and into 2004. It is important to understand the background for these developments. The most appropriate - or optimal - monetary policy response will depend on underlying shocks or disturbances. A number of factors seem to have contributed to pushing down inflation to such a low level. The appreciation of the krone through 2002 contributed to a sharp fall in prices for imported consumer goods. A shift in trade patterns and the cyclical downturn in the world economy may also have contributed. Since mid-2003, however, a more subdued rise in prices for domestically produced goods and services was primarily responsible for reducing overall price inflation. In our Inflation Report, we have pointed out that intensified competition in retail trade and other service sectors in recent years may have contributed. In the first round, increased competition affects companies’ profit margins because prices are pushed down. Many companies have probably responded by rationalising operations in order to cut costs. Although there is probably no model that would a priori have captured the considerable disturbances to which the Norwegian economy has been exposed, it is useful to be able to analyse the effects of the disturbances after they have occurred. Therefore, let us use the model to look at the qualitative effects of a fairly long-lasting increase in competition in product markets. The magnitude and duration of the shock has been adjusted so that inflation in the model illustration falls by around 1 percentage point.

I am therefore delighted that we were able to organise this colloquium with such a set of distinguished speakers, all of which have their exceptional professional standing deeply associated with the financial crisis, either as policy-makers, crisis managers, academics or proponents of regulatory initiatives. My introductory remarks this afternoon are organised around the title of this colloquium. My aim is to review policies in the last few years and draw some policy conclusions. I will first touch upon some of the lessons for financial stability, where Lucas’s contribution was especially important, as responsible for the financial stability function, and then turn to the experience with monetary policy. Lessons for financial stability The financial crisis erupted in August 2007, when off-balance sheet vehicles that had been set up by banks to manage portfolios of complex structured credit securities ran into funding liquidity problems. Although initially a liquidity squeeze, concerns about counterparty credit risks quickly spread as uncertainties intensified about the nature and extent of exposures of banks to what we now call “toxic assets”. And, as we know, these escalating tensions culminated in the bankruptcy of Lehman Brothers in September 2008, an event which triggered an unprecedented surge of volatility across mature-economy financial markets and a broad-based decline of asset prices. With this, an adverse feedback between the condition of the financial system and real economic performance was unleashed, contributing to a sharp economic slowdown across the developed economies.