in some of the countries the number of pensioners will be close to the number of economically active. the basis for economic growth is thus weakened. the burden of rising debt and pension payments will be heavier. financial markets are already now demanding a high interest rate on loans to troubled countries. it takes a long time to reverse demographic trends. the ideals associated with fertility from the mythologies of aphrodite and venus might provide some impetus – not only in mediterranean countries, but in most oecd countries. financial incentives would probably be more effective, however. norway, with favourable support schemes for families with children, has a relatively high birth rate. in other european countries, there is a risk that these hard times will exacerbate the demographic challenge. unemployment, in particular among youth, has risen sharply and many people have a dark view of the future. in the meantime, the acute crisis in the euro area must be addressed. banks and governments have fallen into a vicious cycle. banks were rescued by extensive government measures during the financial crisis, but banking sector exposure to sovereign debt is substantial. this debt has not vanished, but shifted hands. when a country ’ s debt - bearing capacity is called into doubt, it also has an adverse impact on banks. the events of recent years have brought fresh experience and reminded us of several historical lessons. economic policy must be sustainable. governments must save during upturns in order to weather downturns. at the same time, there are limits to what economic policy can accomplish if the economic foundations are eroded. a competitive business sector is crucial to maintaining growth and welfare. this also applies to norway. the financial crisis was a reminder of how risk can be mis - assessed. moreover, risks that operators seem to be managing well individually may prove to be a considerable strain on the financial system as a whole, which warrants contemplation of the new macroprudential surveillance framework that is now in the making. norway, which is in a surplus and net asset position, faces some particular challenges. as investor and manager of the government pension fund global, we have seen that prices bis central bankers ’ speeches and yields can react strongly to uncertainty about the future. in light of the financial turbulence and shifts in the world economy, it is now appropriate to look at the investment strategy in connection with the management of our financial wealth. new steps in the management of financial wealth ( chart 5 : government pension fund global ) norway invests a large proportion of

, and the key policy rate is set on the basis of an overall assessment. asset prices such as house prices, the exchange rate and credit growth therefore have a bearing on norges bank ’ s interest rate setting. a written formulation of norges bank ’ s monetary policy reaction function would be fairly comprehensive and include all the variables that are considered. 8 however, a reaction function must not be confused with the monetary policy target – our target function or loss function. the fact that we give weight to variables such as the exchange rate, house prices and credit growth in interest rate setting does not imply that there are specific targets for these variables. the operational target of monetary policy is annual consumer price inflation of close to 2. 5 per cent over time. interest rate setting in a small, open economy can be particularly challenging in periods of strong credit growth and a wide interest rate differential vis - a - vis other countries. a tightening of monetary policy in norway specifically aimed at curbing property prices and credit growth can result in a rising krone exchange rate, a weaker labour market and excessively low inflation. moreover, a higher interest rate aimed at influencing the housing market would not eliminate the source of repeated credit cycles. there is a risk of a bubble in both the housing and the foreign exchange market when credit growth is high, as observed in iceland and hungary and perhaps even new zealand in the years prior to the financial crisis. interest rates were high in national currencies, but households and enterprises chose to borrow in low - interestrate currencies. 9 there was probably a sentiment of euphoria in the norwegian housing market in 2006 and 2007, but the boom was financed by loans in nok and not foreign currency. should we seek to avert bubbles in the housing market even when medium - term inflation prospects are moderate? on this point, it is our judgement that a distinction must be made between giving greater weight to credit growth and house price inflation in the reaction function and defining house price inflation as an independent monetary policy objective. socalled “ leaning against the wind ” would not require adjustments to norges bank ’ s approach, bearing in mind our reaction function which already gives weight to asset price movements and credit growth. 10 see for example bernanke, gertler and gilchrist : “ the financial accelerator and the flight to quality ”, the review of economics and statistics, 78 ( 1 ), 1996, pp. 1 - 15. see also nina langbraaten ( 2001