budget for 1994 : “ a stable exchange rate can generate expectations of continued low inflation, which in turn influence both price and wage determination. moderate price and wage inflation is also a necessary condition for a stable exchange rate over time. ” a prerequisite for the conduct of monetary policy is that fiscal policy generally contributes to stable economic developments. fiscal policy influences the total level of domestic activity, and thereby the rise in the prices and costs of goods and services produced in norway. in a situation with a high level of economic activity, an expansionary fiscal policy will tend to push up price and wage inflation. this in turn will influence expectations in the foreign exchange market concerning future movements in the exchange rate, fuelling depreciation pressures and therefore impeding the implementation of monetary policy. a fiscal policy adapted to the economic situation, on the other hand, will contribute to facilitating the implementation of monetary policy. in the current economic situation, the pressure in the economy should be dampened. the tightening in the national budget for 1999 of 3 / 4 per cent of gdp will help to curb price and wage inflation and alleviate the pressure on monetary policy. 10 ) conclusion we are thus facing a period of slower growth. given the pressure that has built up in the economy, particularly in the labour market, such a correction is inevitable as a result of production constraints. however, the prospects are much brighter than after the fall in oil prices and the wage settlement in 1986. the norwegian economy – including both households and the business sector – is now in a stronger position to cope with a cyclical turnaround. a few years of slower growth will also have a favourable effect on price and wage inflation in norway, and thereby on the more long - term growth capacity of the economy. norges bank ’ s projections indicate that price and wage inflation could drop to the level of our trading partners after the turn of the millennium. lower domestic demand will also contribute to curbing the strong import growth recorded in recent years, thus improving the current account. as mentioned, forecasting is a challenging task when the economy is on the verge of a turnaround. it is not easy to predict the exact timing of the turnaround. it will be difficult to avoid some adjustment through a slackening in the labour market. even if there are already signs of some slackening, we must bear in mind that the market is still very tight. a moderate wage settlement this spring – with the social partners taking future developments into account – may contribute to maintaining

debt has continued to grow faster than income, which may indicate that the vulnerabilities that built up prior to the crisis are still present. an assessment of systemic risk must include an analysis of both the probability and consequence of a crisis. if the costs associated with a crisis are sufficiently large, systemic risk can be considerable even if the probability of a crisis seems small. as underlined in the theoretical literature, the economy can be vulnerable to substantial deleveraging when debt is at a high level. previous economic downturns provide confirmation of this. the costs of a crisis may then be substantial. the empirical models can provide support when we assess financial imbalances and whether a crisis is emerging. at the same time, humility is required and we must recognise that our ability to provide a precise estimate of systemic risk is limited. no two financial crises are alike, and the financial system is constantly evolving. there are many sources of systemic risk and new ones may emerge – not least when new regulations are introduced. we must be prepared for possible changes in the predictive power of the indicators. norges bank will therefore always have to exercise professional judgment in its assessment of systemic risk. the aim of macroprudential regulation is to strengthen the resilience of the financial system and dampen the build - up of financial imbalances. the purpose of the countercyclical capital buffer is primarily to increase banks ’ resilience to loan losses in a future downturn. if the bis central bankers ’ speeches buffer functions as intended, banks will tighten lending to a lesser extent in a downturn than would otherwise be the case. in addition, the buffer may to some extent dampen high credit growth during an upturn. the buffer rate will be increased when financial imbalances are building up or have built up, thus bolstering resilience when we need it most. the countercyclical capital buffer can thereby have an impact on both the probability and the costs of a crisis. the buffer may thus also reduce fluctuations in the economy. we are now in a phase where banks are facing a number of new capital requirements. banks can choose to adapt to the higher capital requirements by, for example, increasing lending margins or by tightening lending. thus, higher capital requirements could curb economic activity in the short term. as the new requirements are phased in, the buffer will have to be adjusted to the economic situation and other requirements applying to banks. this does not mean that the counter