authorities have focused on exchange rate stability. price inflation has been low. yields on long - term securities indicate no expectations of rising inflation. the perception of market participants seems to be that norway will not resume a policy resulting in high inflation. the political authorities formulate norges bank ’ s mandate for the conduct of monetary policy. the mandate, formulated in the regulation issued in the spring of 1994, states : “ the monetary policy to be conducted by norges bank shall be aimed at maintaining a stable exchange rate against european currencies, based on the range of the exchange rate maintained since the krone was floated on 10 december 1992. in the event of significant changes in the exchange rate, policy instruments will be oriented with a view to returning the exchange rate over time to its initial range. no fluctuation margins are established, nor is there an appurtenant obligation on norges bank to intervene in the foreign exchange market ” ( my italics ). the regulation is based on the fact that we have a floating exchange rate. the first sentence means that this is a managed float. instruments are to be oriented towards maintaining a stable krone exchange rate against european currencies. norges bank chose to define the reference european currencies as the euro from 1 january 1999. the last sentence in the regulation distinguishes our system from a fixed exchange rate regime in that no fluctuation margins have been established around a central rate. to the extent this system calls forth associations with a fixed exchange rate regime, the concept initial range should be interpreted as a broad indication of a central rate around which the krone can fluctuate. the second sentence refers to significant changes in the exchange rate in relation to the initial range. it is important to note that no specific values have been defined for significant changes, such as the fluctuation margins of 2¼ per cent, 6 per cent and 15 per cent used by the eu countries in their exchange rate regime. significant must be given an economic content. a reasonable interpretation is that exchange rate movements must not influence expectations concerning price and cost inflation to the extent that changes in the exchange rate become self - reinforcing. the expressions with a view to, over time, aimed at and based on also show that norges bank has considerable scope for exercising discretion. exercising discretion in exercising this discretion, norges bank places emphasis on the fundamental conditions for achieving exchange rate stability over time. price and cost inflation must be brought down to the level aimed at by the

, as you know, nominal and real yields on both short - term and long - term treasury securities are low by historical standards. moreover, although premiums on private bonds relative to treasury yields have risen somewhat of late, they are still at the low end of their historical range, suggesting that investors are sanguine about default risk and other types of uncertainty. low interest rates have, in turn, been a major force driving the phenomenal run - up in residential real estate prices over the past few years, and the resultant boost to net worth must be one of the reasons households have felt comfortable directing so little of their current income to saving. however, whether low interest rates and other fundamental factors can fully explain the current lofty level of housing prices is the subject of substantial debate. this situation raises some difficult questions. can the aforementioned spending imbalances and possible asset - price anomalies continue without threatening macroeconomic stability? and if they cannot be sustained, how will they unwind? will the transition be relatively benign, or will it be a rocky adjustment with deleterious effects on economic growth, inflation, and other factors? and finally, what role will government policies play in influencing the path of adjustment? sustainability of current imbalances on the question of sustainability, it is worth noting that these sorts of imbalances are not new. the trade account has been persistently in deficit since the late 1970s, and the current account has been in a similar state almost continuously since the early 1980s. the personal saving rate has been declining since the mid 1980s. and the federal government has spent more than it has taken in every year since 1970 except for a brief respite between 1998 and 2001. so these imbalances have been around for a long time, and our economy is still churning out high rates of productivity and income growth. but, the magnitude of these imbalances is increasingly moving into unfamiliar territory. i have already noted the unprecedented level of the current account deficit and the depressed household saving rate. as for the federal budget, the projected funding shortfall in social security and exploding medicare and medicaid costs mean that without a reassertion of fiscal discipline, the long - run outlook for the federal budget balance is for worse to come. the sustainability of these large and growing imbalances has become especially suspect because it would require behavior that appears to be inconsistent with reasonable assumptions about how people spend and invest. for example, it seems unlikely that foreigners would be willing