a period. fiscal policy is an important instrument for smoothing fluctuations in the economy. however, it has proved difficult to prevent fiscal policy from being influenced by mood shifts that occur when the economy approaches a peak and memories of earlier recessions fade. monetary policy shall provide a nominal anchor for economic developments. with exchange rate stability as the anchor, monetary policy may be pro - cyclical in periods. this may give rise to considerable challenges in terms of the government ’ s and the storting ’ s ( norwegian parliament ) ability and will to maintain a firm fiscal stance. under a system designed to maintain exchange rate stability, it is important that the authorities actually manage to implement fiscal policy in such a way that pronounced and undesirable cyclical fluctuations do not occur. during the last cyclical upturn, fiscal policy has been relatively tight, but the tightening element became weaker as growth gained momentum. fiscal policy should have been tighter in 1996, 1997 and 1998. another lesson from this period is that investment in the petroleum sector should be managed better in order to avoid fluctuations in the mainland economy. one cannot expect the central government budget to be able to counter the shocks to the mainland economy originating from the wide fluctuations in demand from oil companies. 2 ) internal instability fiscal policy has not had a sufficient stabilising effect on the economy in recent years. this has given rise to a dilemma for the social partners involved in the income settlements. moderate wage settlements made a substantial contribution to achieving broad - based employment growth from 1992. in the period 1993 - 1998, employment rose by more than 250 000, while unemployment fell from about 6. 5 per cent to below 3 per cent, the lowest rate – 3 – recorded for 10 years. whereas 20 unemployed were competing for each vacancy at the employment offices in 1993, the ratio was reduced to a little more than 2 in 1998. an increasingly tight labour market has led to rising wage growth. last year ’ s wage settlements resulted in nominal wage growth of 6 per cent in 1998. evidence suggests that wages in norway rose by more than 71 / 2 per cent between the fourth quarter of 1997 and the fourth quarter of 1998. in the local government sector, wage growth is set to top 9 per cent at the end of the year. as pay increases became effective late in the year, the wage carry - over into 1999 ( 3 - 31 / 2 per cent ) will be substantial. assuming normal wage drift - roughly 1 - 11 / 2 per cent - and moderate negotiated

faced with such a substantial decline in income alongside imbalances in the labour market. developments in the 1970s and 1980s showed that a higher rise in costs in norway relative to other countries leads to a slacker labour market. this will also be the case this time. 5 ) pressures on the exchange rate of commodity - based economies there is a correlation between price inflation and the exchange rate. as mentioned, the exchange rate has a significant influence on prices and costs through its effect on import prices. furthermore, a precondition for maintaining a stable exchange rate against european countries is that inflation in norway is over time on a par with the inflation rate prevailing in these countries. the high rise in costs in 1998 was probably the main factor that weakened confidence in the krone. international conditions also played a significant part. in 1998, the world economy was hit by the financial crisis in asia, russia and brazil, falling commodity prices and widespread unrest in international financial markets. the asian crisis proved to be more serious and prolonged than envisaged, and the contagion effects were more severe than most observers had anticipated. weaker global demand contributed to a sharp fall in commodity prices, which in turn had a severe impact on commodity - based economies such as norway, canada, new zealand and australia. for all these countries, the terms of trade worsened and exchange rates depreciated. the asian crisis also made investors more cautious, with an outflow of investment from countries perceived as risky. after it became clear that russia would not, in practice, be servicing its foreign debt, market participants became highly risk - averse. the unrest spread to european – 6 – financial markets and norway. investors fled to safe - haven countries such as germany, the us and switzerland, and the currencies of countries with less liquid and more volatile financial markets depreciated. this included countries such as norway and sweden. the norwegian krone depreciated sharply from around 101 against the ecu index at the beginning of the year to 115 in october, or the weakest rate since the objective of exchange rate stability against the ecu was adopted. 6 ) monetary policy in 1998 norges bank responded to the sharp depreciation of the krone by raising its key rates in several steps in 1998. these rates were first raised in march, after the krone weakened in the first three months of the year from 101 to about 103. 5 against the ecu index. the krone then appreciated slightly and stab