tax reform. the tax code had already been tailored to capture the economic rent in the petroleum sector – the petroleum company tax rate is about 80 percent. confidence in monetary policy gradually gained a firmer footing, after a succession of devaluations had come to a halt. inflation and the real interest rate declined, and cost competitiveness improved considerably. norway has not experienced a really pronounced economic downturn since the crisis around 1990. we have been helped by good luck, in terms of favourable terms - of - trade shocks and a relatively flexible labour market, which has allowed labour supply to grow. the economy was fairly robust when the financial crisis hit in 2008, in sharp contrast to our situation back in the 1980s. a more robust policy framework has improved the functioning of the economy. the act relating to the government petroleum fund was passed in 1990. at the time, in the midst of a deep recession, many doubted that any petroleum revenues would ever be saved. projections indicated that offshore petroleum production would peak in the early 1990s. however, the government ’ s cash flow from the petroleum sector started to increase sharply, and a strategy for the management of the fund was needed. the policy guidelines were bis central bankers ’ speeches clarified in 2001, and rules governing the interaction between norway ’ s petroleum wealth and fiscal policy were established : • all government revenues from the oil sector are to be transferred to the fund. • according to the fiscal rule, the government must only spend, on average over the cycle, the expected real return on the fund – stipulated at 4 per cent – in the annual budget. • all of the fund ’ s capital is to be invested in international markets. after nearly three decades of spending the petroleum revenues more or less as they came in, the fiscal rule enabled the government to save for future generations. at the same time, the rule made fiscal policy more robust : by decoupling spending from current petroleum revenues, the fiscal rule provides for a gradual and sustainable phasing - in of petroleum revenue spending. the guidelines ensure the necessary flexibility to allow automatic stabilisers to work, and they allow for careful countercyclical policy. the savings plan has remained intact and the fund has now reached a size of nearly nok 4 trillion, or 130 percent of gdp. when the fiscal rule was introduced in 2001, norges bank was charged with the task of keeping inflation low and stable. thus, our traditional fixed exchange rate policy was abandoned. a clear division of responsibilities between monetary

svein gjedrem : inflation targeting address by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the seminar on foreign exchange policy issues arranged by the association of economists, gausdal, 31 january 2003. the address is based on the assessments presented at norges bank ’ s press conference following the executive board ’ s monetary policy meeting on 22 january and on previous speeches. please note that the text below may differ slightly from the actual presentation. * * * the norwegian economy exhibited strong growth from 1993 until 1998. this recovery brought the economy out of recession into a period of high economic activity. mainland gpd and consumer prices percentage change on previous year mainland gdp consumer prices 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 source : statistics norway sg gausdal 31. 01. 03 growth in the mainland economy in the 1990s averaged over 3 per cent. inflation was low and stable at around 2½ per cent annually, while it was higher than 8 per cent in the 1980s. annual wage growth1 ) and unemployment rate2 ) per cent annual wage growth unemployment 1 99 4 19 9 6 1 99 7 19 9 9 2 0 00 2 00 2 1 ) average for all groups. including costs associated with additional vacation days 2 ) registered unemployed as a percentage of the labour force sources : trcis, the directorate of labour and norges bank sg gausdal 31. 01. 03 at the same time, total employment rose sharply. the unemployment rate, measured by the lfs, fell from close to 6 per cent in 1991 to almost 3 per cent in 1999. later in the 1990s, unemployment declined as long as wage growth in norway was lower than wage growth among our trading partners. this came to a halt in 1998. the rise in salaries for white - collar workers accelerated and the social partners rejected a policy of wage moderation. unemployment stopped falling. output gap per cent of trend gdp hodrick - prescott method production function method - 1 - 1 - 2 - 2 - 3 - 3 - 4 - 4 - 5 - 5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 sources : statistics norway and norges bank sg gausdal 31. 01. 03 at the beginning of the 1990s, the economy was in a deep recession. production was well below capacity. when growth in the economy picked up, capacity utilisation increased. the output gap, according to our methods of calculation, was closed