svein gjedrem : inflation targeting in an oil economy address by mr svein gjedrem, governor of norges bank ( central bank of norway ), at sparebanken møre, alesund, 4 june 2002. please note that the text below may differ slightly from the actual presentation. * * * norway is unique in being both a fully developed economy and a major oil exporter. last year, norway was the world ’ s third largest exporter of oil. in the future, we will become an increasingly important exporter of natural gas. the present value of remaining petroleum reserves has been estimated at nok 2 200bn, or roughly 1½ times our current gdp. the bulk of norway ’ s petroleum wealth will be extracted over a period of 40 years, from 1990 to 2030. new technology has had a significant impact on our future production potential. in spite of rapid production growth, the estimated present value of our petroleum wealth has increased some 35 - 40 per cent over the last ten years, measured in real terms. as an example, the registered oil reserves in the ekofisk field are larger today than when the field started production 30 years ago. revenues from the petroleum sector have generated a fiscal surplus of some 10 - 15 per cent since 2000. a similar surplus is generated on the current account, reflecting capital outflows to the government petroleum fund. even in 1998, when the oil price fell to 10 usd / barrel, norway had a fiscal surplus of some 4 per cent of gdp. the existence of abundant natural resources can be a mixed blessing. experience elsewhere suggests that the sudden occurrence of major income flows tends to undermine future production potential. in the long term, it is difficult to ensure an efficient distribution of wealth between and within generations without triggering rent - seeking behaviour among households and firms. in the short term, the volatility in income flows and in terms of trade poses a challenge for monetary and fiscal policy. the mixed blessing of national wealth is not a new problem. vigilant observers were already aware of this in the 17th century. in modern economic language, the moroccan ambassador to spain pointed to the problem of deteriorating competitiveness 300 years ago ( see chart 2 ). the main long - term challenge to economic policy is how the returns on petroleum wealth can be phased into the economy without a deterioration of our future growth potential. even with our substantial petroleum reserves, human capital is by far our most important resource. it accounts for over

per cent stronger than in 1990. over this longer period, other nordic currencies have shown larger fluctuations. over the last two years, the appreciation of the norwegian krone has been driven by the wide and increased interest rate differential between norway and other countries. the interest rate differential reflects high growth in wages and aggregate demand in norway. there is thus a clear link between cost pressures in the norwegian economy and the exchange rate. the link works through interest rate expectations driving the krone upwards. the appreciation of the krone has a dampening effect on inflation. at the same time, profitability in the internationally exposed sector is under pressure both due to higher wage costs and the appreciation of the krone. but the krone can move in both directions. it will not appreciate indefinitely. if the krone follows the path of the forward rate, it will depreciate in the years ahead. the forward effective krone exchange rate two years ahead is close to the average level of the effective exchange rate during the 1990s. nordic countries – institutional differences eu membership monetary policy regime sweden yes inflation target of 2 per cent ( + / - 1 percentage points ) denmark yes erm ii finland yes member of emu iceland norway no ( eea agreement ) no ( eea agreement ) inflation target of 2½ per cent inflation target of 2½ per cent sg 240802 sector composition of norex exchanges. june 2002 100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % stockholm industrials and materials financial services copenhagen it / telecom energy oslo consumer goods and services other sg 240802 government net cash flow from the petroleum sector and total capital in the government petroleum fund. per cent of gdp total capital ( end of year ) net cash flow 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 source : ministry of finance. rnb 02 sg 240802 gdp mainland - norway and employment. percentage change from previous year gdp mainland norway employment average 1990 - 2001 = 2. 8 % - 1 - 1 - 2 - 2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 source : statistics norway sg 240802 correlation with world index. usd based price indexes 0, 8 dec 93 - 1997 0, 6 1998 - 2002 0, 4 0, 2 denmark finland norway sweden source : ecowin / financial times sg 240802 key interest rates in the nordic countries 12, 0 11, 0 10, 0 12