A krone that is stable - but too strong - also entails costs to the economy in the form of low activity. Similarly, a krone that is stable - but weak - is a source of high inflation. 2  Trend growth is used as a rough estimate of potential output. Potential output is the level of output that is consistent with stable inflation over time. BIS Review 25/2004  3  Petroleum revenues generally provide substantial, but uneven currency inflows into Norway. The currency flows might have led to a strong and volatile krone. This tendency is countered when the annual use of petroleum revenues over the central government budget is predictable and independent of annual revenue flows, and the remainder is invested abroad. The capital outflow through the Petroleum Fund contributes to both curbing the appreciation of the krone and maintaining its stability. Norges Bank has not defined an exchange rate target. Nevertheless, developments in the krone are of considerable importance to interest-rate setting because exchange rate developments have an impact on inflation and output. When there are prospects of moderate economic activity, low wage growth and low inflation, Norges Bank will reduce the interest rate. This will normally result in a depreciation of the krone. Prices for imported goods and services will increase. A weaker krone strengthens the competitiveness of Norwegian enterprises and indirectly leads to higher output, employment and inflation. Themes in foreign exchange markets shift. In periods, investor focus on stock returns feeds through to exchange rate movements.

But probably the most striking unconventional feature of our monetary policy back then was the active recourse to reserve requirements, the rates of which were increased to levels exceeding by far those of any other central bank in the EU: 20 and 40 percent for lei- and forex-denominated liabilities respectively in 2006. However, taking into account that studies published even before 2006 considered the pure IT framework as not necessarily the most suitable for an emerging economy, one might think that the NBR’s departure from the mainstream was less significant. Specifically, the NBR opted for  2  BIS central bankers’ speeches  a “light” version of inflation targeting, which meant retaining the managed float feature of the exchange rate regime, which implied smoothing out excessive volatility, without defending a certain level of the exchange rate or preannouncing interventions. The actual form inflation targeting took in Romania thus matched the “managed-floating plus” concept introduced by Goldstein in 2002, considered the most suitable choice for an emergingmarket economy involved in the global capital market, as it combines the managed float part with an inflation targeting monetary policy strategy and an active pursuit of measures to limit the degree of currency mismatches in the economy. Subsequently, this “managed-floating plus” approach gained acceptance, especially during the global crisis, and now forex interventions are part of the arsenal of many central banks, including some of those using a free floating regime before the crisis. 3. Did markets and banks react to the departure from the paradigm?