, reforms prove to be very profitable even though they are painful in the short run. among the changes in the norwegian economy from the 1990s on were the removal of subsidies, closing down of government - owned enterprises, deregulation in important markets like housing and electricity, tax reform which increased incentives to work and closed tax evasion loopholes, and the reform of parliamentary budget procedures. finally, a fiscal rule was put in place, providing a sustainable relationship between the government pension fund and the government budget. the fiscal rule states that the government every year shall use the estimated long term real return on the fund, set at 4 per cent. however, there is no direct link between petroleum revenues and the fund. the government collects taxes from the whole economy, including the petroleum sector. after all government expenditures are paid, the surplus is transferred to the fund. the last 10 years, fiscal policy has been geared towards a cyclically adjusted non - oil deficit which corresponds to 4 per cent of the fund every year. let me now turn to one very specific norwegian issue : the management of our oil fund, called the government pension fund global. for the last 20 years, norway has been a major petroleum producer. at the maximum, our nation produced about 4 per cent of global petroleum. this geological luck has given the norwegian state an overwhelming cash flow. the first money was transferred to the fund in 1996. fifteen years later the fund stands at nok 3. 2 trillion, or eur 410 billion. it is probably the second largest sovereign wealth fund in the world. the fund is now 120 per cent of norway ’ s gdp. norges bank, as manager of this financial wealth, has laid down several governing principles for the fund. we seek no controlling stakes. in fact, the maximum ownership in any one company is 10 per cent. we seek as good a return as possible, given the moderate level of risk defined by the norwegian parliament and the ministry of finance. although government - owned, the fund has no role at all in norwegian foreign policy. the fund is managed within an ethical framework. this framework has two pillars. some companies are excluded from the investment universe, by the ministry of finance. and norges bank has a corporate governance department which works together with the companies we invest in. the overall principle for the investment strategy of the fund is to keep a medium risk profile, defined by the parliament and ministry. norges bank makes investment decisions within this bis central bankers ’ speeches risk profile,

. that figure is around 4 per cent annually, for most western countries. a fiscal balance can hide important imbalances. if one sector in the economy is far too large, the taxes from this sector can contribute significantly to the fiscal budget. an example is the construction sector in some european countries in the years leading up to the crisis. in normal times, this sector is around 3 – 5 per cent of gdp in most countries. in spain, housing construction was 9 per cent in 2006. in ireland, the contribution was 11 per cent. when problems arose, construction activity decreased and tax income was reduced significantly. therefore, one should also look at the current account. inflation above 4 per cent might indicate that price stability is not firmly anchored. if unemployment is above 4 per cent of the labour force, it might signal a labour market out of order. finally, the risk of running into a crisis seems to increase if the total assets of the banking sector constitute more than 4 times gdp. this table illustrates the 4 per cent rule. many countries had negative fiscal balances through the last decade despite moderate to high economic growth. spain seemed to be in a different position with a positive fiscal balance, though this was mainly due to unsustainable high growth in the construction sector. this illustrates the first question, which is how to solve time inconsistency in fiscal policy. it is easier to follow the prescriptions of keynes in bad times than in good times. this asymmetry may lead to an increase in budget deficits and sovereign debt over time, also referred to as the fiscal bias. as a result, many countries are forced to tighten policy in a period when the real economy would certainly benefit from further stimulus. the crisis caused fiscal balances to deteriorate by 8 – 10 percentage points of gdp. there is an immense difference between encountering a shock of this magnitude from a positive fiscal balance of 4 per cent and encountering it from a negative fiscal balance of 4 per cent. a similar time inconsistency problem, the inflation bias, has been a much debated issue in monetary policy. the solution has been central bank independence. the results have been fairly good. the question remains, is there a lesson to be learnt in the fields of fiscal policy and banking regulation? this crisis has been very benign to the norwegian economy. one of the reasons, i believe, is that we had a national banking crisis only 20 years ago. many of the executives in banks, corporations