Macroprudential measures and credit conditions Nevertheless, whether macroprudential interventions could quell a credit boom is important. That turns largely on the effects on the cost of finance. I worry that too much of the analysis of this area is oversimplified, assuming blandly that an increase in capital requirements will always and everywhere lead to tighter credit conditions, and so slow the boom. I would be surprised if that were a universal law. A required substitution to more expensive equity finance will, indeed, tend to push up banks’ funding costs, but the effect on overall funding costs will depend on whether, and by how much, debt financing costs fall due to a lower probability of bankruptcy. Crucially, there is an important difference between, on the one hand, banks having to have more equity in steady state and, on the other hand, an intervention by a macroprudential body to increase capital requirements temporarily. The macroprudential body’s policy action will reveal information. Borrowing some language from the literature on monetary policy, it sheds light on the policymakers’ views on the current risks to stability (the state of the  14  See Gennaioli, Shleifer, and Vishny (2012). “Neglected Risks, Financial Innovation and Financial Fragility.” Journal of Financial Economics 104, no. 3: 452–468; and Tucker (2011), Discussion of Lord Turner’s lecture “Reforming finance: are we being radical enough?”. Clare Distinguished Lecture in Economics, Cambridge. 6  BIS central bankers’ speeches  economy and/or the financial system itself), and also on how the Committee reaches policy decisions (its reaction function).

However, monetary policy can dampen the impact on output and employment in a transitional period. Chart: Labour costs relative to trading partners The policy rate has been cut and the interest rate differential between Norway and other countries reduced. Lower interest rates stimulate consumption and investment. The krone has depreciated markedly and has recently been at historically low levels. The depreciation of the krone is contributing to underpinning inflation and dampening the effects of lower oil prices on output and employment. Even though the cost level in Norway is still high compared with other countries, a weaker krone is strengthening the competitiveness of Norwegian firms exposed to international competition. At the same time, wage growth in Norway has moderated, and there are prospects that real wage growth in 2015 will be at its lowest in 20 years. Norway is therefore in a sound position to tackle the restructuring facing the economy. Conclusion The monetary policy instrument employed by Norges Bank is the key policy rate. With a wellfunctioning money and credit market, changes in the key policy rate will normally be transmitted to short-term and long-term rates. In recent years, a number of our trading partners have employed unconventional instruments to achieve a sufficiently expansionary monetary policy. This is not under consideration in Norway. We still have room for manoeuvre in economic policy. Based on our current assessment of the outlook for the Norwegian economy, there is little likelihood of a negative key policy rate in Norway. BIS central bankers’ speeches  9