economic perspectives annual address by governor ida wolden bache to the supervisory council of norges bank thursday 16 february 2023 economic perspectives 2023 this is a day i have been looking forward to for some time. at long last, we can hold this event as it should be held – at our traditional norges bank venue filled to the brim. three years have passed since last time – three years less ordinary. we have endured a pandemic and the most restrictive measures seen in a time of peace. we have witnessed russia ’ s brutal war campaign against ukraine. the war is a deep tragedy for the people of ukraine and a dire threat to peace and stability in europe. both the war and the pandemic have had far - reaching economic consequences. over the past year, inflation has reared its head, with inflation rates reaching multi - decade highs. the costs of high inflation have come into clear evidence. what started as a rise in a few prices ended up as a rise in a broad range of goods and services prices. rapid and unexpected price increases are eroding peoples ’ finances and are impacting those with small margins hardest. the surge in inflation is also putting monetary policy and norges bank to the test. it is our responsibility to bring it down. that is something i have been mindful of during my first year as central bank governor. the 1970s – high and variable inflation let us go back in time 50 years. in the first half of 1973, the global economy is in full expansion. the preceding few years have been marked by mounting inflationary pressures ( chart 1 ). norges bank economic perspectives 2023 chart 1 high and variable inflation in the 1970s consumer prices. four - quarter change. percent oecd norway sources : statistics norway and norges bank in norway, too, prices are rising quickly. “ price problems ”, as they are called, are a source of political concern. in summer 1973, the price problems commission, headed by deputy governor hermod skanland, presents its report. the commission recommends closer cooperation between the authorities and the social partners to bring inflation under control. but the recommendation is not immediately followed. 1 the price problems prove to be much worse than feared. on 6 october, war breaks out in the middle east. the war is not only fought with military weapons, but also with economic weapons. the arab opec countries impose an oil embargo on the major industrial economies in response to their backing israel. oil prices

from falling below target. but financial intermediaries also create liquidity. 12 as financial markets in kenneth s. rogoff ( 2006 ) : ” impact of globalisation on monetary policy ”, a symposium sponsored by federal reserve bank of kansas city, jackson hole, wyoming. uncertainty about future inflation generates uncertainty as to the real value of investments and investors may require an extra compensation – a risk premium – for this. uncertainty about future inflation generates uncertainty as to the real value of investments and investors may require an extra compensation – a risk premium – for this. e. g. because of inadequate public pensions and safety nets or the desire to make inter - generational transfers of proceeds from non - renewable resources. the saving glut theory has been emphasised by ben bernanke ( 2005 ), now chairman of the federal reserve, in the speech ” the global saving glut and the u. s. current account deficit ”, see www. federalreserve. gov. since then the list of references discussing this issue is unlimited, but the imf world economic outlook september 2005, “ global imbalances : a saving and investment perspective ” offers a discussion. one proponent of the liquidity glut theory is richard duncan “ the dollar crisis ”, john wile & sons, 2005. see also the survey of the world economy in the economist september 16th – 22nd 2006 ( unnatural causes of debt ) for a discussion. different countries have become more integrated and new financial instruments have been introduced, liquidity and credit flow more easily between borrowers and lenders across borders. more than ever before financial intermediaries are driving the global credit - and liquidity creating process, and today, financial intermediaries have a substantial impact on global monetary conditions. in a recent article in the financial times, mohamed el - erian observes that : “ central bankers now operate in a world where monetary policy influences only a small part of the fluctuations in overall liquidity in the economy. endogenous liquidity, or the extent to which the market itself expands and contracts liquidity, has taken over as the main driver. ” 13 this may well be so but it is far from obvious why abundant liquidity, which is necessarily short - term, and low short - term interest rates should keep long - term rates very low over protracted periods of time. there might have been elements of both a saving glut and a liquidity glut in recent years. it seems