easier and enhances overall efficiency. transparency reinforces both the central bank ’ s independence and the market ’ s support for monetary policy. is there any chance to survive outside monetary policy blocks? i would like to conclude these remarks by addressing the more fundamental question of the feasibility, or even desirability, of pursuing an independent monetary policy in the vicinity of a large monetary zone. is it realistic to assume that the snb, for example, can follow a monetary policy that differs from the one set by the ecb? wouldn ’ t it be preferable to have a fixed exchange rate between the swiss franc and the euro? and with switzerland now being fully surrounded by euroland, is there any danger the euro replacing the swiss franc? those are, of course, the questions we had to answer when the euro was launched in 1999. our experience so far has shown that the much feared euroization of switzerland has not taken place. to date, the swiss franc has kept its attractiveness. it has been stable enough to be relied on as a valuable medium of exchange and store of value. euros are accepted in switzerland as a means of payment, like dollars or pounds sterling, but there is no sign of the franc being crowded out. a more important question, however, is the desirability of an independent monetary course for a small country located in the midst of the euro zone. isn ’ t an autonomous policy a myth in a world where capital markets are so well integrated? wouldn ’ t a country be better off by importing the monetary stability of its large neighbour? unfortunately, the painful case of argentina shows that fixing the exchange rate does not solve all the problems. when country - specific shocks are large and persistent, the absence of a national policy can be extremely costly. but let me again take the example of switzerland. shocks to the swiss economy are not perfectly correlated with shocks to the euro area, and our business cycle is more influenced by developments in the investment goods market and in the financial market than the rest of europe. therefore, it seems rather intuitive that a “ swiss - made ” monetary policy would potentially fit switzerland ’ s needs better than a “ one - size - fits - all ” european policy. the latest recession is a case in point. the investment spree of the late nineties created a massive worldwide capital overhang. the collapse in asset prices, in 2001, and the ensuing worldwide recession had a particularly strong impact on switzerland, whose exporters

may have been somewhat higher earlier this year than we had assumed. when demand for goods and services is high, as it is now, firms can in turn pass on higher costs for labour, energy and intermediate goods to domestic consumer prices. some firms may take advantage of the good times by raising prices a little more than necessary in order to increase margins. chart : low and stable inflation is a public good the political authorities have mandated norges bank to keep inflation low and stable. we are also mandated to help keep employment as high as possible and to promote economic stability over time. low and stable inflation is important for the economy to function well and is a prerequisite for predictability. i don ’ t think any of us want to return to the great inflation of the 1970s. inflation also tends to become more variable at high levels, making it more difficult for both businesses and households to plan ahead and make financial decisions. by keeping inflation low and stable, we contribute to maintaining economic activity and employment at a high level. 2 / 3 bis central bankers'speeches high and variable inflation rates also have distributional implications. as an unexpected rise in prices will not automatically be followed by an increase in wages and benefits, the result will be a reduction in purchasing power, particularly for those with low incomes and small margins. norges bank cannot influence international commodity prices or water reservoir levels. inflation caused by these factors is beyond our control. but we can take steps to prevent inflation from becoming entrenched. higher interest rates have the effect of reducing demand for both labour and goods and services, thereby pushing down wage and price inflation. in addition, higher interest rates can contribute to strengthening the krone, which can in turn curb the rise in prices for imported goods. chart : household debt has increased as the policy rate is raised, residential mortgage rates will rise. norwegian households are highly leveraged. over the past 30 years, household debt as a percentage of disposable income has doubled. with higher debt, increased interest rates will have a stronger impact on household budgets and, combined with the high level of inflation, will curb growth in household consumption ahead. in just under a year, we have raised the policy rate five times. this means higher interest expenses for two out of three households. both in terms of hard cash and as a percentage of disposable income, interest expenses will increase most for households with the highest incomes, which is also the group with the highest debt to income ratios. as