The other Nordic countries deregulated credit and housing markets, but this was followed by growth bubbles. At the same time, monetary policy was tightened in order to stabilise the exchange rate and rein in high inflation. This proved to be impossible without a sharp fall in the level of activity and employment, and high interest rates shook the financial system. Following the crises, the Nordic countries were not locked into a low growth trap. Many enterprises were closed. This freed up labour and other resources that could be channelled to new areas. The decline in itself provided fertile ground for innovation and entrepreneurship – we experienced creative destruction in the Nordic economies. An elaborate system of direct regulation of activities in the business sector and the labour market was devised in the post-war period. Loans from banks and financial undertakings were regulated through quotas that were set out in a separate credit budget and state banks accounted for a substantial share of credit to households and enterprises. Cross-border capital movements – for example non-resident rights to buy Norwegian equities and Norwegian enterprises' access to foreign funding – were regulated by separate quotas. The government authorities set both short-term and long-term interest rates at a low level, with demand for credit periodically outstripping supply. Credit was rationed. The krone exchange rate was in principle fixed, but was frequently adjusted when cost inflation spiralled out of control despite extensive regulation. House prices in cities were regulated, with queues and under-the-table transactions.

We have kept the interest rate markedly lower than that level since autumn 2003. Since the economic recovery started, it has gradually broadened. Capacity utilisation is now at a very high level. There are reports of limited capacity in most industries and regions and labour shortages in almost every occupational category. There are shortages of drivers, pre-school teachers, supervisors, engineers, carpenters, architects, auditors, accountants, IT personnel and health workers. It has probably not been since the 1970s that we find such widespread reports of purely physical production constraints, for example now in the form of shortages of rigs and other equipment in the petroleum industry or shortages of plank, concrete and insulation in the construction industry. 4  BIS Review 15/2007  When we reduced the interest rate in 2003, demand and output rapidly picked up. However, it took a long time for employment to rise and the next phase from a pick-up in employment to a fall in unemployment was also long. But now the upturn has entered into a mature phase. As illustrated in the chart, capacity utilisation was higher than its normal level in 2006. Nevertheless, wage growth has thus far been moderate and inflation is clearly lower than the target of 2½ per cent. The decline in import prices, increased labour flows and higher productivity came into clear evidence when wage and price inflation fell markedly 3-4 years ago. A period of low real interest rates would nevertheless have been appropriate in order to realise the added growth potential.