tax reform. the tax code had already been tailored to capture the economic rent in the petroleum sector – the petroleum company tax rate is about 80 percent. confidence in monetary policy gradually gained a firmer footing, after a succession of devaluations had come to a halt. inflation and the real interest rate declined, and cost competitiveness improved considerably. norway has not experienced a really pronounced economic downturn since the crisis around 1990. we have been helped by good luck, in terms of favourable terms - of - trade shocks and a relatively flexible labour market, which has allowed labour supply to grow. the economy was fairly robust when the financial crisis hit in 2008, in sharp contrast to our situation back in the 1980s. a more robust policy framework has improved the functioning of the economy. the act relating to the government petroleum fund was passed in 1990. at the time, in the midst of a deep recession, many doubted that any petroleum revenues would ever be saved. projections indicated that offshore petroleum production would peak in the early 1990s. however, the government ’ s cash flow from the petroleum sector started to increase sharply, and a strategy for the management of the fund was needed. the policy guidelines were bis central bankers ’ speeches clarified in 2001, and rules governing the interaction between norway ’ s petroleum wealth and fiscal policy were established : • all government revenues from the oil sector are to be transferred to the fund. • according to the fiscal rule, the government must only spend, on average over the cycle, the expected real return on the fund – stipulated at 4 per cent – in the annual budget. • all of the fund ’ s capital is to be invested in international markets. after nearly three decades of spending the petroleum revenues more or less as they came in, the fiscal rule enabled the government to save for future generations. at the same time, the rule made fiscal policy more robust : by decoupling spending from current petroleum revenues, the fiscal rule provides for a gradual and sustainable phasing - in of petroleum revenue spending. the guidelines ensure the necessary flexibility to allow automatic stabilisers to work, and they allow for careful countercyclical policy. the savings plan has remained intact and the fund has now reached a size of nearly nok 4 trillion, or 130 percent of gdp. when the fiscal rule was introduced in 2001, norges bank was charged with the task of keeping inflation low and stable. thus, our traditional fixed exchange rate policy was abandoned. a clear division of responsibilities between monetary

a logical possibility, the first point to make is that it is not at all obvious how a policy that drives inflation below target would raise inflationary expectations. the second point is that a macroprudential framework can be described in ways that are fully consistent with retaining concerns about prices as the primary objective of monetary policy. if measured inflation is low, higher interest rates to respond to macroprudential concerns may drive it to unacceptably low levels. however, if the financial excesses are not checked, the bust following the boom seems likely to push inflation lower still. resisting the financial excesses, and avoiding the worse of the two outcomes, can then legitimately be described as consistent with the pursuit of price stability, albeit over a somewhat longer horizon than central banks commonly target today. recognising that a boom - bust sequence at low inflation could result in continuously falling prices, such a policy might even be described as insurance against deflation. since nominal rigidities can ( although they need not ) make deflations resistant to policy stimulus, 20 insurance of this sort might be cheap at the price. the problem of capital inflows being generated by higher interest rates is a potentially serious one. one possibility might be a measured use of capital controls. another possibility would be to let the exchange rate rise, accepting unwanted near - term disinflationary pressures ( especially in the traded goods sector ) as the price to be paid for avoiding still stronger downward pressures on prices over the longer term. the least attractive option would seem to be massive foreign exchange intervention, as currently practiced by a number of asian countries, which further compounds the underlying problem of excess credit creation both at home and abroad. the final impediment to the use of monetary policy for macroprudential purposes, technical difficulties having to do with a focus on asset prices, will only be removed when these narrow questions are put into a broader conceptual framework for evaluating macroprudential concerns. for some, this will require a paradigm shift which will not be easily achieved. if one believes that financial imbalances are truly dangerous, this must be considered an unfortunate constraint on policy. in contrast, for those that do not believe in such dangers, the fact that monetary policy will continue along the same successful path it has followed for over a decade will seem fully satisfactory. references altman, e i, a resti and a sironi ( 2002 ) : “ the link between default and recovery rates : effects on