relatively limited. credit developments in the past year have given ambiguous signals to our interest - rate setting. growth in household debt is high. enterprises have been reducing their debt for some time, but developments over the past months may suggest that this trend has been reversed. norwegian enterprises and households borrow primarily at variable rates. loans with no form of fixed rate agreement account for over 80 per cent of the value of loans to the household and enterprise sector. the current interest rate level is very low. long - term investments cannot be made based on the assumption that this interest rate level will persist. according to money market expectations, the interest rate will eventually stabilise at close to 5½ per cent. this interest rate, plus a premium for banks ’ margins, provides a more realistic indication of the interest rate level that will apply over the loan ’ s life than the variable interest rates prevailing today. growth in the norwegian economy is now solid. it appears that growth will also be high in 2005. from 2006, growth is expected to slow gradually to, and eventually somewhat below, the level of growth in potential output. in inflation report 3 / 04, the output gap is projected to become clearly positive in the course of 2005 and to remain positive until the end of the projection period. inflation is projected to show a marked increase over the next year. in the short run, the depreciation of the krone in 2003 will continue to exert upward pressure on imported consumer goods. we also assume that the pronounced fall in prices for some goods and services last autumn will to some extent be reversed. in the somewhat longer term, inflation will show a more gradual rise. higher resource utilisation in the norwegian economy will lead to somewhat higher wage growth and will also make it possible for enterprises to increase their operating margins. however, inflation will still be restrained by low external price impulses. the positive contributions from the exchange rate depreciation in 2003 will unwind in the course of spring 2005. the contribution from the exchange rate to inflation will then gradually become slightly negative. there are prospects that inflation will reach the inflation target towards the end of the projection period. there is uncertainty surrounding the projections. the projections are partly based on our analysis of relationships in the economy, the exchange rate assumption and the forward interest rate assumption. we can give some indication of the uncertainty surrounding the projections on the basis of historical deviations between projected and actual price developments. based on these calculations, inflation at end - 2007 is projected with

jarle bergo : monetary policy, cyclical fluctuations and competitiveness address by mr jarle bergo, deputy governor of norges bank ( central bank of norway ), to the norwegian association of economists, 5 september 2002. the address is based on the assessments presented at norges bank ’ s press conference following the executive board ’ s monetary policy meeting on 7 august and on previous speeches. * 1. * * introduction thank you for giving me this opportunity to discuss the relationships between monetary policy, cyclical developments and competitiveness. there has been some debate about monetary policy this summer. part of this debate has focused on the role monetary policy can and should have in smoothing fluctuations in the real economy and safeguarding competitiveness in the norwegian business sector. some have maintained that we place too much weight on reaching the inflation target. statements like this should be discussed in the light of what monetary policy can be used for and of the broad effects on the economy of various monetary policy objectives. only when we have clarified our options, can we discuss whether the emphasis on the inflation target is “ too great ”, “ too little ” or “ just right ”. i hope to be able to offer some clarification today. i think it will also become clear that norges bank in its implementation of monetary policy consciously seeks to avoid unnecessary disturbances in the real economy. first of all, i would like to present a theoretical outline of how monetary policy works and then indicate some relevant and realistic monetary policy objectives. i will then discuss and assess norwegian monetary policy on this basis, including the trade - offs we face in economic policy. it is important to note that it is a question of trade - offs. we simply cannot have everything we want. 2a. how does monetary policy influence the economy? monetary policy affects the economy through several channels, together referred to as the transmission mechanism of monetary policy. in a closed economy, monetary policy mainly works by influencing demand through changes in the real interest rate. in an open economy, monetary policy also works through changes in the exchange rate. let us make a stylised review of what happens if the central bank raises the key interest rate. in the short and medium term, prices are relatively rigid. as a result, the short and longer real rates of interest also tend to increase when the nominal interest rate is raised. in addition, there is both a nominal and a real appreciation of the exchange rate. the presentation is largely based on svensson, lars e. o