jarle bergo : monetary policy and cyclical developments speech by mr jarle bergo, deputy governor of norges bank ( central bank of norway ), at sparebanken sogn og fjordane, førde, 18 october 2004. the text below may differ slightly from the actual presentation. the address is based on the assessments presented at norges bank ’ s press conference following the executive board ’ s monetary policy meeting on 22 september, inflation report 2 / 04 and on previous speeches. the references and the charts in pdf - format can also be found on the website of the norges bank. * * * price stability, in the sense of low and stable inflation, is the objective of monetary policy in a number of countries. historical experience from norway and other countries has shown that high inflation has resulted in unstable output and employment. in addition, a fall in the price level will often accompany a period of decline. the first inflation target was introduced in new zealand in 1990. canada followed in 1991, the uk in 1992, and sweden and australia in 1993. in norway, the government issued a regulation introducing an inflation target in 2001. monetary policy in euro area countries and switzerland is also aimed at price stability, even though this is not referred to as inflation targeting in these countries. inflation targeting has proved to be particularly appropriate in very open small and medium - sized economies. commodity exports play a particularly important role in several of the countries that were the first to introduce inflation targeting. current inflation is low, but our recent history shows that without a nominal anchor inflation was high and variable and that we did not achieve higher growth in exchange for inflation. an economic policy that fuels inflation does not generate higher economic growth. on the contrary, it paves the way for subsequent recession and unemployment. high and variable inflation usually accompanies instability in output and employment. but inflation should not be too low over time either. this is partly because the structure of the economy evolves over time. demand for labour with different qualifications changes. restructuring requires changes in real wages and relative wages. nominal wages do not readily fall. with some measure of inflation, real wages and relative wages can be changed without reducing nominal wages. some degree of inflation oils the economic machinery. in periods, it will be appropriate to stimulate the economy with low, or even negative, real interest rates. if inflation becomes entrenched at a very low level, the interest rate will be less effective as an instrument because it cannot be set

the infrastructure requirements of a growing indian economy. it is worth highlighting that outstanding bank credit to the infrastructure sector, which stood at rs. 72. 43 billion in 1999 – 2000, has increased steadily to rs. 7860. 45 bn in 2012 – 13, a compounded annual bis central bankers ’ speeches growth rate ( cagr ) of 43. 41 per cent over the last thirteen years ( table 1 ) against an overall cagr of bank finance to all industries at 20. 38 per cent during the same period. the share of bank finance to infrastructure in gross bank credit has increased from 1. 63 per cent in 2001 to 13. 37 per cent in 2013. between march 2008 and 2013 alone, banks ’ exposure to infrastructure has grown by more than 3 times. this apart, credit has also flown into infrastructure sector via nbfcs, mutual funds and capital markets, the source of bulk of which is bank finance. it may not, therefore, be correct to argue that lack of finance from banks has constrained the development of the infrastructure sector. 9. in fact, recognizing the importance of infrastructural development in the country, rbi has provided certain concessions / relaxations in lending to infrastructure sector, such as, enhancement in single / group borrower limits, permission to issue guarantees favoring other lending institutions in respect of infrastructure projects, asset classification benefits under restructuring guidelines and permission to extend finance for funding promoter ’ s equity, subject to certain conditions. in order to encourage lending by banks to the infrastructure sector, banks are permitted to finance spvs registered under the companies act, set up for financing infrastructure projects, after ensuring that these loans / investments are not used for financing the budget of state governments. 1 rbi, in a recent circular ( march 18, 2013 ), has allowed the debts due to the lenders in case of public - private partnership ( ppp ) projects to be considered as secured to the extent assured by the project authority in terms of the concession agreement, subject to certain conditions. impaired assets in infrastructure sector 10. the evidence, thus, clearly suggests that banks have been substantially financing infrastructure projects in the country notwithstanding the inadequate commercialization of projects due to regulatory, political and legal constraints and total absence or insufficiency of user charges in many sectors. of course, this has not been without a fair share of pain for them. the npas and the restructured assets in this segment have increased quite substantially of late. the gross npas and restructured