For many advanced economies, the decade and a half leading up to the financial crisis was indeed a period of unusual macroeconomic stability, with low and stable inflation accompanied by steady growth – the Great Moderation. Inflation targeting and similar price-stability oriented monetary policies appeared to have delivered the goods. But in a number of countries – most obviously the United States, but also including Australia, Ireland, Spain and the United Kingdom – this period was also characterised by rapid credit growth and property price inflation, sowing the seeds of future problems (Chart 3). Now many factors contributed to the severity of the subsequent financial crisis. A non-exhaustive list includes: the development of complex securities which were impossible to value in stressed conditions and which connected financial institutions in unexpected ways; disguised leverage through the use of securitisation vehicles, whose real aim was regulatory arbitrage; remuneration packages encouraging positions that generated decent returns most of the time but high losses in some states of the world; excessive reliance on credit-rating agencies; defective risk management; and insufficient high-quality capital to absorb losses when they materialised. But macroeconomic conditions possibly also played a part2. Far from fostering financial stability, the Great Moderation may itself have contributed to the build-up of credit and the adoption of risky positions by leading investors to underestimate potential macroeconomic risks. And commentators, such as John Taylor (2009) and Bill White (2009) have blamed excessively loose monetary policy during the years leading up to the crisis.

Income and wage determination is fairly centralised, and the social partners evaluate the effects of wage outcomes on employment. 2. In a number of countries that have switched to a monetary policy regime based on inflation targeting, fiscal policy is oriented towards reducing government debt and deficits. In Norway, fiscal policy has traditionally played an important role in demand management. This task is facilitated by the fact that the Norwegian government has greater financial leeway than most other countries, due to its oil revenues. Norwegian government authorities receive substantial revenues from the extraction of oil in the North Sea. Norway is the world’s second largest exporter of oil, and the budget surplus is currently approximately 11% of GDP. Oil revenues increase consumption possibilities. However, it is a challenge to manage these resources in a way that increases welfare for both current and future generations. A rapid expansion of the sheltered sector based on uncertain and perhaps temporary increases in petroleum revenues may lead to the situation called Dutch disease. To manage its resources, Norway has created the Government Petroleum Fund, which receives revenues from the petroleum sector, transfers the amount necessary to produce a balanced government budget and invests the surplus abroad. As long as the increase in petroleum income is kept outside the domestic economy, there will be less need for structural change and thus less need for exchange rates to change.