in the private service sector and the retail trade. productivity growth in the private sector was higher in norway than in the us through the 1990s, for example. high productivity growth in many service industries has contributed to this. the growth rates for the 1990s must to some extent be seen in connection with cyclical developments during this period which started with a recession and ended with a tendency towards overheating in the labour market at the end of the period. productivity growth has been particularly strong in the retail sector, financial services and postal and telecommunications services. these are industries that have undergone extensive changes in structure, technology and market adaptation. it has not been as strong in transport and commercial services. these changes have been associated with productivity gains - and thereby higher wages and income growth - for larger groups. in addition, this has contributed to keeping inflation at a low level and spurring large new investment projects. this may also have amplified the strong expansion in the norwegian economy at the end of the 1990s, which could imply that the sharp growth in services has contributed to the relatively high real rate of interest in norway in recent years. we know that variations in productivity can influence the real exchange rate. when an economy goes through a period of high productivity growth and high returns on many investment projects, real interest rates will normally increase. over time, the real interest rate must reflect the economy's longterm growth potential. when real interest rates rise in our country relative to other countries, we have to expect that the real exchange rate will move in line with the same pattern that can be observed when we increase the use of petroleum revenues in the domestic economy. there is symmetry here. a decline in productivity growth will have the opposite effect. developments in the 1990s may, over a very long time horizon, prove to have been an episode - and the considerable structural changes in the services sector a one - off event. this would imply that the economy will tend to return to its previous path. but it is also possible that we will see a new round of pronounced productivity gains thanks to new technology and new structures.

inflation under control quickly, but with considerable fluctuations in the real economy as a consequence ; or it may be used more gradually with less of an impact on the real economy, but with inflation being allowed to deviate from the target over a slightly longer period. in the short term, there will thus be a trade - off between output and employment developments and the variation in inflation around the inflation target. in the theoretical literature this trade - off is often described as a loss function in which both output and inflation variability are included. the idea is that the central bank shall minimise a weighted average of the two. the loss function can be depicted in stylised form in a chart with output variability ( deviation from “ natural ” or potential output ) and inflation variability along the axes. it is assumed that the central bank wants - if it had been possible - output and price stability. the welfare loss will thus be smaller the further into the chart we are. the lines in the chart ( indifference curves ) thus show different combinations of inflation variability and output variability that result in the same welfare loss. lars svensson, who is a prominent contributor to theoretical research in the area of monetary policy, has recommended that the central bank should explicitly define a loss function. he proposes an expression where the squared deviation between inflation and the inflation target and the squared deviation between actual and potential output be weighted together to provide a measure of the loss in each period. the total loss is then found by discounting future losses. up to now, no central bank has gone as far as svensson recommends. however, the horizon that is chosen for monetary policy will implicitly provide some indication of the central bank ’ s loss function. if the horizon is very short, inflation will be quickly brought back to the target, with greater fluctuations in output as a result. this indicates that the central bank puts considerable weight on avoiding variations in inflation and little weight on stabilising the real economy. similarly, if the horizon is long, it will indicate that the central bank also puts greater weight on avoiding variations in output and employment. the chart illustrates the optimal combinations of inflation and output variability. the three points in the chart reflect different types of inflation targeting. strict inflation targeting means that only the variation in inflation is included in the loss function. no weight is given to output changes, thereby resulting in relatively high output variability. monetary policy has the swiftest effect through the exchange rate channel. if inflation is higher than the inflation target, the central bank