the one hand, stable output, and on the other hand, low and stable inflation. historical data for norway and other countries show that interest rate changes affect aggregate demand fairly quickly. using the rimini model, we have estimated the effects of a 1 percentage point increase in interest rates over a period of two years. the chart shows that, in isolation, an interest rate increase of this magnitude may reduce mainland gdp by ¾ - 1 per cent after two years. the effect will depend on a number of factors, such as household loan debt and corporate profitability. household and business expectations may also play a part in determining the impact of interest rates. the band in the chart illustrates some of this uncertainty as shown by our models. in practice, it is often difficult to determine how long the interest rate will be kept at high or low level. the associated effects, for example on the exchange rate, will inevitably change if the interest rate is changed for a shorter or longer period than in our analysis. experience shows that the time it takes for a change in interest rates to have an impact will also vary. for example, the interest rate increases in 1998 had an impact on wage growth as early as the following spring. in other situations, it may take longer. the impact on consumer price inflation is also uncertain. the inflation rate is reduced by an estimated 0. 20 - 0. 35 percentage point after two years and 0. 30 - 0. 40 percentage point after three years. the result will depend partly on how the exchange rate reacts to the increase in interest rates. all the above estimates are based on the assumption that monetary policy credibility remains firm. for example, if an interest rate decrease reduces credibility, the impact on the exchange rate and inflation may be substantially stronger than indicated here. however, it is impossible to quantify these effects. sizeable interest rate changes could theoretically influence monetary policy credibility. the above estimates are therefore based on small interest rate changes. pronounced interest rate changes could have a different impact from that described here. forward rates reflect the market expectation of future levels of short - term interest rates. the difference between german and norwegian forward rates reflects different inflation expectations and a risk premium. during the period when the objective of monetary policy was a stable exchange rate against the euro, the difference between norwegian and german long - term interest rates was about ½ percentage point less than it is today. the difference between norwegian and germany 10 - year forward rates widened by about ½ percentage point after the introduction of the

markets, the value of norway ’ s financial wealth is increasing. close to 60 percent of the capital in the government pension fund global – norway ’ s sovereign wealth fund – is invested in global equity markets. when times are good in the global economy and optimism is on the rise, the return on the fund increases. conversely, turbulence and low risk willingness in the market have a negative effect on the fund ’ s assets. this is a risk we have to live with to achieve solid returns over time. because of the fund ’ s long - term horizon, short - term risk tolerance is high. we can exploit this by sitting tight and engaging in countercyclical investment. the fund ’ s size also allows us to reduce risk by spreading our investments across many countries. norway has become a global financial investor. through the fund ’ s investments, norway increasingly takes part in value added generated in other countries. over the past hundred years, growing global trade and cross - border flows of capital and labour have been important factors driving economic progress. at times, the principles of free trade and capital movements have been set out of play. walls have been erected between countries in the form of trade barriers and restrictions on capital flows. this has not been successful. countries that have attempted to shield their economies from the rest of the world have fallen back into stagnation. nascent signs of increased protectionism are again giving cause for concern. if this tendency intensifies, international trade and prosperity will be undermined. with its open economy, norway would be severely affected. it is in our own interest to make an active effort to counteract such a development. monetary policy – a nominal anchor against the background of an economic downturn and low interest rates among norway ’ s trading partners, the conduct of monetary policy in norway is challenging. a higher key policy rate might have curbed debt growth and demand pressures in the norwegian economy. but in an environment of persistently low external interest rates, such a policy would likely have led to a sharp appreciation of the krone, resulting in too low levels of inflation and economic activity. thus, the crisis in europe and weak growth in the us are also contributing to keeping interest rates in norway at a low level. bis central bankers ’ speeches the main objective of monetary policy in norway is low and stable inflation. this objective provides the economy with a nominal anchor. with firmly anchored inflation expectations, monetary policy can contribute to stable developments in the real economy. chart 7 : rise