wider acceptance and legitimacy to make sure that the basis for strong multilateral cooperation and collective action is also in place when policies for reform and prevention are implemented. truly global challenges call for truly global solutions anchored in a multilateral and statutory - based system of representation like the bretton wood institutions. all countries, large and small, rich and poor, should be represented, even if only indirectly through constituencies. general government fiscal balances as a percentage of nominal gdp, 2000 – 2011 projections from oecd for 2010 – 2011 these are some lessons learned from the crisis. still, several unresolved questions remain. the chart shows general government fiscal balances as a percentage of gdp in selected countries. many countries had negative fiscal balances through the last decade despite moderate to high economic growth. spain seemed to be in a different position with a positive fiscal balance, though this was mainly due to unsustainable high growth in the construction sector. this illustrates the first question, which is how to solve time inconsistency in fiscal policy. it is easier to follow the prescriptions of keynes in bad times than in good times. this asymmetry may lead to an increase in budget deficits and sovereign debt over time, also referred to as the fiscal bias. as a result, many countries ( piigs, uk, ) have to tighten policy in a period when the real economy would certainly benefit from further stimulus. the crisis caused fiscal balances to deteriorate by 8 – 10 percentage points. there is an immense difference between encountering a shock of this magnitude from a positive fiscal balance of 4 per cent and encountering it from a negative fiscal balance of 4 per cent. from a negative balance of 4 per cent, fiscal balances end up at a 12 per cent deficit! then it is imperative to tighten policy. a similar time inconsistency problem, the inflation bias, has been a much debated issue in monetary policy. the solution has been central bank independence. so the question is, is there something to be learnt from monetary policy? ragnar frisch the fiscal bias is not a new phenomenon. and a number of possible solutions have been tried. as far back as in the early 1930s, the norwegian economist and nobel prize winner ragnar frisch had the following suggestion : “ it might be an idea to establish a cyclical council to make such decisions, a council that could operate with an independent status similar to that of the supreme court. the council should comprise members

jan f qvigstad : lessons from the crisis for monetary policy and financial stability speech by mr jan f qvigstad, deputy governor of norges bank ( central bank of norway ), at the annual money, macro and finance conference, limassol, 3 september 2010. * * * first i would like to thank you for inviting me and giving me this opportunity to comment on lessons from the crisis. i will concentrate my talk around three lessons and two questions. what i am going to highlight is by no means revolutionary, rather it reflects a growing consensus on experiences from the crisis. 20 minutes only allows me to briefly touch on the different subjects. for a more in depth analysis and discussion of similar issues that i raise here today, i can recommend the jackson hole paper by charles bean et. al. transmission mechanism was affected by the financial crisis the first lesson is that monetary policy is more than setting the key policy rate. we also need to monitor the transmission mechanism closely. the transmission mechanism was affected by the financial crisis. constraints on banks ’ access to funding and a heightened level of perceived risk led to higher lending margins and higher bond spreads. the chart shows developments in our key policy rate and banks mortgage lending rates from august 2007 to november 2008. the widening spread between these two interest rates was not unique to norway, but occurred in several countries. banks also tightened their credit standards in response to the crisis. in norway, as in most other countries, this was particularly distinct for credit to enterprises. both higher spreads and tighter credit standards can have potentially strong contractionary effects on the economy and needed to be counteracted. liquidity and capital support was necessary to restore credit flows the contractionary forces from the financial sector were addressed by providing liquidity and capital to banks, through both regular and unconventional instruments in many countries. government actions enabled banks to continue to provide credit to households and enterprises. the crisis demonstrated that the transmission mechanism is important for the effectiveness of monetary policy. it also demonstrated that the relationship between price stability and financial stability must be given due attention. in norges bank there is close integration between the two areas norges bank monetary policy and norges bank financial stability. norges bank financial stability participates at all meetings in the monetary policy process. this ensures that sufficient attention is given to developments in the financial system. it also provided the necessary insight to make wellinformed assessments of the transmission mechanism during the crisis. considerable revision of the interest rate forecast during the crisis the