open economies can be vulnerable to large capital movements when powerful instruments are deployed by large countries. a possible side - effect of balance sheet policy is that the private sector also takes longer to strengthen equity capital and reduce risk than it would otherwise have done. with the low price of capital, it costs little to postpone restructuring and put off debt repayment. finally, confidence in economic policy may be affected. the dividing line between monetary and fiscal policy seems to be more blurred. balance sheet policy may dampen the effects of market volatility on interest rates and give heavily indebted countries a breathing space and time to adjust. on the other hand, the measures may also reduce the incentive to carry out necessary fiscal tightening. in the euro area, different considerations are now being balanced in the new “ outright monetary transactions ” ( omt ) programme. under this programme, the european central bank ( ecb ) may only purchase bonds from countries that have entered into a loan agreement under the european financial stability facility ( efsf ) or the european stability mechanism ( esm ) – which in turn is conditional on a commitment to fiscal tightening. chart : corporate borrowing rates one reason for the ecb ’ s decision to establish the omt programme is the partial breakdown of the monetary policy transmission mechanism in the euro area economy. there are wide differences in interest rates facing banks and firms across europe. although the same key rates apply to all the euro area countries, average corporate borrowing rates differ widely from country to country. some of the variation is due to differences in credit risk across countries owing to very different economic situations. additional risk premiums may reflect fears that one or more countries might at some point have to replace the euro with a new local currency. ecb president mario draghi has referred to these as convertibility risk premiums. one of the objectives of the omt programme is to reduce this premium and restore the proper transmission of monetary policy. the omt programme can be regarded as an answer to the signs of financial market fragmentation in the euro area. differences in financial conditions across countries have become considerable and the willingness to provide loans across national borders has declined. the same picture is reflected in the so - called target2 balances. target2 is the central interbank settlement system in the euro area. in all countries, interbank payment settlement is carried out by the national central bank. one bank ’ s payment to another is settled by adjusting the two banks ’ deposits in the central bank. central bank

. unemployment has risen slightly again in eastern norway. this reflects lower employment in private services that may be a result of a slight downturn in the ict industries and retail trade. the government ’ s long - term programme for 2002 - 2005, which was approved by the storting in june 2001, states : " considerable emphasis must be placed on stabilising fluctuations in the economy in order to ensure appropriate capacity utilisation and low unemployment. petroleum revenues will gradually be phased into the economy, approximately in step with the expected real return of the petroleum fund. " fiscal policy will contribute to stimulating activity in the economy because of the increase in spending of oil revenues. the new guidelines imply that the non - oil deficit will increase in the years ahead. this will provide a substantial fiscal stimulus every year. summary the tragic events in the us on 11 september will contribute to a further dampening of activity in the american, asian and european economies. it is too early to predict the long - term effects. reactions in financial markets have been pronounced. share prices have fallen sharply. the u. s. dollar has depreciated. currencies of other economies such as sweden have depreciated. central banks have ensured the smooth functioning of markets by supplying liquidity to the banking system. interest rates have been cut in the us, canada, the euro area, switzerland, sweden, hong kong, taiwan, denmark, japan, the uk, new zealand, korea and malaysia. these cuts will contribute to mitigating the negative effects on demand, output and employment. the norwegian economy is characterised by high capacity utilisation and strong cost inflation. the mainland economy appears to be expanding approximately in line with growth in output potential. at present, we do not have sufficient evidence to assert that international developments will change this situation. the announced increase in spending of petroleum revenues may lead to a more expansionary fiscal stance than in recent years. according to norges bank ’ s assessment, with an unchanged interest rate ahead, the probability that inflation two years ahead will be higher than 2½ per cent is the same as the probability that it will be lower.