øystein olsen : the norwegian economy – macroeconomic developments and monetary policy speech by mr øystein olsen, governor of norges bank ( central bank of norway ), at the finance norway's capital markets day 2018, oslo, 6 april 2018. * * * accompanying slides first of all, i would like to thank finance norway for the opportunity to speak to you today about macroeconomic developments and monetary policy in norway. as you may be aware, a new regulation on monetary policy came into force earlier this spring. i will return to the regulation and its implications for the conduct of monetary policy and the interest rate outlook. but first, let me start abroad. chart : economic growth following the financial crisis the advanced economies have emerged from a challenging period. ten years ago the world economy was hit by a shock and thrown into the deepest recession since the 1930s. the economic downturn that followed the financial crisis stands apart from earlier recessions. it was both deeper and longer. potent measures were deployed to address the crisis, but it has still taken time to get the world economy back on its feet. monetary policy had to play a substantial role in the wake of the crisis. without powerful economic policy measures, there was a risk of a self - reinforcing recession. chart : global real interest rates central banks were led into unknown territory and implemented unconventional measures. already low long - term real interest rates were brought down even further. ten years of historically low interest rates and large - scale asset purchases give cause for reflection. an important question is what responsibilities should rest with a central bank. a related theme is what is meant by the objective of low and stable inflation. chart : inflation in norway the primary objective of monetary policy is to maintain monetary stability, as part of the central bank ’ s responsibility for the monetary system. inflation that is either too high or too low has undesired consequences, such as arbitrary wealth redistribution, underinvestment and resource misallocations. the result is lower activity and lower welfare. since 1990, an increasing number of countries have chosen to link monetary stability to a numerical inflation target. since the financial crisis, all of these countries have maintained their inflation targeting regimes. this reflects the overall positive experience with this framework. it did not get in the way of a powerful response to the financial crisis. in norway too, inflation targeting has functioned well. inflation has remained low and stable since it came down in the early 1990s, and the inflation target has anchored inflation

2. 5 percent. an expected real appreciation could then occur partly in the form of wider price and cost differentials between norway and its trading partners. the period of rising oil revenue spending now appears largely to be over. thus, it is difficult to find compelling arguments for setting an inflation target in norway today that differs from that of our trading partners. the new regulation is consistent with how monetary policy has been conducted in practice in recent years. the regulation states that : “ inflation targeting shall be forward - looking and flexible so that it can contribute to high and stable output and employment and to counteract the build - up of financial imbalances. ” as long as there is confidence that inflation will remain low and stable, monetary policy can contribute to stabilising the economy. when the economy is exposed to shocks, the central bank can respond rapidly by adjusting the key policy rate, as we did in 2008 and when oil prices fell in 2014. a flexible inflation targeting regime can reduce the risk of unemployment becoming entrenched at a high level following economic contractions. nevertheless, monetary policy cannot assume primary responsibility for high output and employment. the level of output and employment over time depends on overall economic policy, including the tax and social security system, the wage formation process and the functioning of the labour market. monetary policy is only one component of such an overall framework. 2 / 4 bis central bankers'speeches the importance of financial markets and financial stability was underestimated before the crisis – also by central banks. the financial crisis revealed how harmful financial imbalances can be. monetary policy can in given situations take account of the risk of a build - up of financial imbalances. but monetary policy cannot take primary responsibility for heading off a gathering storm. regulation and supervision of financial institutions are the primary means of addressing shocks to the financial system. the build - up of financial imbalances has in recent years been given little weight in monetary policy among the major central banks. their focus has been on counteracting a deeper and more prolonged downturn and on preventing deflation. in countries that were less affected by the financial crisis, more attention has been devoted to financial stability considerations. in high - tech, global financial markets, capital moves rapidly between different currencies. a wide interest rate differential could have a substantial impact on the exchange rate, with repercussions on inflation, output and employment. this is why low interest rates in large economies that were severely hit by the financial crisis quickly