øystein olsen : economic perspectives address by mr øystein olsen, governor of the norges bank ( central bank of norway ), to the supervisory council of norges bank and invited guests, oslo, 17 february 2011. * * * nearly a decade has passed since the inflation targeting regime was introduced. in spring 2001, norges bank was charged with the task of setting the interest rate with a view to keeping inflation low and stable. at the same time, new fiscal policy guidelines, also known as the fiscal rule, were implemented, charting a course for petroleum revenue spending. for the first time in a long time, economic policy in norway was given an overall long - term anchor and a binding operational objective. in report no. 29 to the storting from 2001, the storting was informed of the new guidelines. the report may not qualify as poetry, but it is a document to which i have a close relationship. this evening i will take a look at the experiences of these operational guidelines and discuss the following questions. has the inflation target and the fiscal rule lived up to the expectations of ten years ago? and how can the experiences of the past ten years be used in addressing today ’ s challenges? in 2011 it is also ten years since georg akerlof, michael spence and joseph stiglitz were awarded the nobel prize in economics for their work on asymmetric information. the theories provide a backdrop to understanding the financial crisis that engulfed the world economy in 2008. a lack of reliable information resulted in excess risk - taking by many, perhaps unknowingly. investors and banks believed they could pass on losses to others or expected the authorities to intervene in the event of failure. it is now widely recognised that the regulatory framework for financial markets was too weak. increased ambitions with regard to regulating financial markets and new and better instruments are on the agenda. i will revert to this later. but let me start with the external environment. the world economy : keeping one ’ s house in order provides robustness the global economic crisis in autumn 2008 was the biggest economic earthquake in our time. the following year, world gdp fell for the first time in generations. the crisis was triggered by an abrupt decline in the us housing market, but a tightly interwoven financial sector caused the problems to spread rapidly across countries and sectors. when the bubble burst, excessive optimism in the financial sector turned to deep pessimism. the flow of credit dried up. it became expensive

monetary policy easing measures, the single currency came under downward pressure. by the beginning of december, the expectations of financial market participants had not been fulfilled and the euro gained in value again. by comparison with its mid - year level, the euro has appreciated only marginally on a trade - weighted basis. demand for secure investments remained high worldwide. on the bond markets, yields on longer - term government bonds declined further. chart 1 shows that the decline in yields in the euro area was somewhat greater than in the us. the yields on ten - year german government bonds have fallen by almost 20 basis points since the end of june. in france and italy, the decline in yields was more pronounced. meanwhile, yields on ten - year us treasury bonds have changed relatively little. on the swiss capital market, almost the entire yield curve has shifted downwards again since mid - year. yields on confederation bonds with terms of up to 13 years are currently in negative territory. this corresponds to three - quarters of the outstanding volume. at the beginning of december, the yield on ten - year confederation bonds reached a new low of – 0. 4 %. most recently, it was trading at – 0. 25 % or about 40 basis points lower than mid - year. bis central bankers ’ speeches how negative interest works in the second part of my remarks today, i will talk about the way in which negative interest works. since january, the swiss national bank ( snb ) has been charging negative interest of – 0. 75 % on sight deposits held by banks and other financial market participants at the snb. negative interest is a key instrument in our monetary policy. together with our willingness to intervene on the foreign exchange market, it counteracts the overvaluation of the swiss franc. when calculating negative interest, the snb grants the banks exemptions so that the banking system does not have to carry the full burden resulting from the high level of sight deposits. for banks subject to minimum reserve requirements, the exemption threshold is calculated as 20 times the minimum reserve requirement, based on a reference period. for sight deposit account holders not subject to any minimum reserve requirements, the exemption threshold has been set at a minimum of chf 10 million. by applying negative interest universally to all account holders, we are adhering to the principle of equal treatment. it therefore makes sense that banks with above - average sight deposits in proportion to their minimum reserves pay higher interest than other banks. in this respect, negative interest is no different to