. norwegian government authorities receive substantial revenues from the extraction of oil in the north sea. norway is the world ’ s second largest exporter of oil, and the budget surplus is currently approximately 11 % of gdp. oil revenues increase consumption possibilities. however, it is a challenge to manage these resources in a way that increases welfare for both current and future generations. a rapid expansion of the sheltered sector based on uncertain and perhaps temporary increases in petroleum revenues may lead to the situation called dutch disease. to manage its resources, norway has created the government petroleum fund, which receives revenues from the petroleum sector, transfers the amount necessary to produce a balanced government budget and invests the surplus abroad. as long as the increase in petroleum income is kept outside the domestic economy, there will be less need for structural change and thus less need for exchange rates to change. a one dollar increase in the oil price gives an increase in gdp of almost 1 % and most of it arrives as increased budget revenues. with large and varying budget revenues, the basis for determining central government expenditure and taxes from one year to the next may easily be impaired. if budget expenditure is allowed to fluctuate in step with oil prices, the result may be abrupt shifts and instability in the norwegian economy. changes in oil prices may then quickly influence wage and price expectations, the exchange rate and long - term rates. in that case it will be very demanding to achieve nominal stability. short - term interest rates would have to be changed frequently and sharply and would generally reflect a high risk premium for the norwegian krone. it is therefore important that the annual budgets are anchored in a long - term strategy that takes into account that oil revenues may fluctuate from one year to the next. in addition, it is advantageous if fiscal policy can be used to counter fluctuations in demand and production. final words by hosting this workshop, we hope to take part in an exchange of new knowledge about the conduct of monetary policy. we hope that the workshop will be a fruitful experience for both researchers and monetary policymakers.

aimed at by the euro countries in 2 to 3 years for a given interest rate path, norges bank will consider adjusting the interest rate. in this narrow sense, one could say that the conduct of monetary policy in norway has some similarities with “ inflation forecast targeting ”, in lars svensson ’ s terminology. in addition to economic forecasts, we aim to develop tools that can supplement the use of our large macroeconometric model. at the moment we are working on the construction of simple calibrated models that will be presented at this workshop. the calibrated models can be employed, for instance, to test the performance of simple indicator rules. how does the norwegian system differ from inflation targeting? the institutional arrangement for monetary policy in norway does differ in some respects from that in countries with an inflation target. some central banks with explicit inflation targets have to give an explanation to the government or other authorities if the inflation target is not being met. our mandate, however, refers to an exchange rate target as opposed to an inflation target. if a situation arises in which norges bank is not able to return the krone to its initial range, as defined in the mandate, without triggering inflation or a deflationary recession, the bank will inform the authorities that measures other than those available to the central bank are required. one possibility could then be to recommend fiscal measures that make it possible to bring the krone exchange rate back to its initial range and stabilise it. some observers have argued that the possibility that such situations can arise creates an uncertainty that may weaken the credibility of norwegian monetary policy. however, norges bank has declared that it cannot with open eyes contribute to higher inflation or a deflationary recession. financial market indicators show no evidence of monetary policy lacking credibility. although the actual conduct of monetary policy is similar to inflation targeting, there are a number of institutional differences between the norwegian system and inflation targeting regimes. 1. norway has a long tradition of cooperation between the political authorities and the social partners. income and wage determination is fairly centralised, and the social partners evaluate the effects of wage outcomes on employment. 2. in a number of countries that have switched to a monetary policy regime based on inflation targeting, fiscal policy is oriented towards reducing government debt and deficits. in norway, fiscal policy has traditionally played an important role in demand management. this task is facilitated by the fact that the norwegian government has greater financial leeway than most other countries, due to its oil revenues