The absence of a nominal anchor was one of the main reasons behind the pronounced swings in the real economy in the 1970s and 1980s. It was demonstrated that a long-run trade-off between inflation and unemployment does not exist. Today, monetary policy aimed at price stability is the norm, and in most countries monetary policy has been delegated to independent central banks. We have also learned that very high policy ambitions are not compatible with the way the economy really works. Attempts to control all the quirks of the economy will eventually undermine the intentions. In fact, by scaling back on overly high policy ambitions the overall outcome will be better. Today the beneficial effects of making full use of markets in resource allocation are again widely recognised. State ownership and “dirigisme” have been reduced. Competition has increased in most markets, though lapses do occur from time to time. Trade barriers have generally been lifted or reduced. Well developed financial markets help move capital across borders and between industries. Today’s economic environment has in many respects risen from the ashes of failed paradigms. In a sense, today’s regime resembles the one we had 100 years ago. From the mid-19th century until the outbreak of the First World War, capital markets were integrated across countries that had adopted the gold standard. Markets were largely deregulated. Cross-border financial capital movements were subject to little or no regulation. There was solid confidence in the gold standard as a nominal anchor. Inflation was low and stable, supporting economic growth.

The entrance of new, large emerging economies into the world trading system has strongly influenced relative prices and the prospects for nominal stability. The potential labour supply available for the global economy has doubled 7 and increased relative to the supply of capital. Wage shares have fallen and profit shares have risen, both globally and in Norway. Firms in high-cost countries increasingly offshore activities to low-cost countries. Imports of goods in industrialised countries have shifted from high-cost to low-cost countries. Furthermore, the collapse of the Soviet Union and the accession of Central and East European countries to the European Union have played a significant role for the labour market in Europe. Labour migration has increased. Off-shoring and outsourcing – or merely the threat of it – may have, at least temporarily, reduced the bargaining power of trade unions and employees. Increased competition, both in product and labour markets, has probably motivated productivityenhancing measures. Productivity growth has been unusually high. 5  John Gieve (2006): “Practical Issues in Preparing for Cross-Border Financial Crises”, at the Financial Stability Forum Workshop: “Planning and Communication for Financial Crises and Business Continuity Incidents”, 13 November. 6  Financial Times January 16 2008. 7  See Richard Freeman (2006) “Labour Market Imbalances: Shortages, or Surpluses, or Fish Stories?” presented at the Federal Reserve Bank of Boston’s Economic Conference, June. 4  BIS Review 14/2008  Lower import prices, intensified competition and high productivity growth have been important disinflationary forces both in Norway and elsewhere.