svein gjedrem : the conduct of monetary policy introductory statement by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the hearing before the standing committee on finance and economic affairs of the storting ( norwegian parliament ), oslo, 18 may 2010. please note that the text below may differ from the actual presentation. the statement is based on norges bank ’ s annual report for 2009, monetary policy report 1 / 10 and the executive board ’ s assessments in the period to the monetary policy meeting on 5 may. * * * i would like to thank the chairman of the committee and also thank the committee for this opportunity to report on the conduct of monetary policy in connection with the storting ’ s deliberations on the government ’ s financial market report ( previously the credit report ). my statement is based on the bank ’ s annual report, but is also updated based on the executive board ’ s assessments for the period to the previous monetary policy meeting and new information received to date. i also refer to this year ’ s report from norges bank watch, a group of experts that evaluates norges bank ’ s conduct of monetary policy. 1. new imbalances the most acute phase of the financial market crisis has for a period appeared to be over. in most parts of the world, output growth has resumed. the recovery has been strongest in emerging asia. the upturn in oecd countries has been more moderate. the economies of many countries will continue to be marked by high levels of spare production capacity. but the situation is fragile. the crisis has given rise to new imbalances. fiscal deficits have risen substantially in many countries and a number of countries are in the midst of a fiscal crisis. government debt in the major advanced economies is as high measured as a share of gdp as it was immediately after the second world war when the surge in military spending had been financed by borrowing. even with substantial tax cuts, strong growth in public spending and very low interest rates, unemployment has risen considerably in both the us and europe. in many countries, unemployment has reached double digits. there is a risk that unemployment will become entrenched, particularly perhaps in europe. 2. financial crisis after a long upturn, the financial crisis started to unfold in summer 2007. in autumn 2008, a full - blown systemic crisis erupted in the financial system. after the collapse of the investment bank lehman brothers, activity

the entire financial system. financial institutions started to doubt their counterparties and interbank lending came to a halt. experience shows the need for tighter regulation of systemically important banks. this can for example be achieved by introducing higher bank capital and liquidity requirements for such banks. the capital requirement for mortgage lending should to a larger extent reflect the overall risk of such loans. see carmen m. reinhart and kenneth s. rogoff ( 2009 ) : “ this time is different. eight centuries of financial folly ”, princeton university press. justified criticism has been levelled at international banks. the focus is now shifting to government fiscal management in many countries. fiscal slippage seems to have been considerable in some european countries in particular. eu budget policy guidelines have been diluted and have not been adhered to. countries have experimented with budget frameworks and have debt - financed public investments, which require operating and maintenance costs but yield little income. with already large deficits, the crisis has destroyed state finances in many countries. economic developments over the next 5 – 10 years will be marked by the tightening measures that will now have to be implemented in these countries. however, there are exceptions. state finances in nordic countries are in order, which provides a better starting point. with ample state coffers, the norwegian economy was to a considerable extent insulated from the effects of the financial crisis in 2008 and 2009. norway has had room for manoeuvre because solid state finances secure credibility and because inflation expectations are firmly anchored. even though oil prices fell from close to usd 150 per barrel in summer 2008 to almost usd 30 at the end of the year, norway ’ s state finances were not called into question. in addition, oil prices increased markedly as early as spring last year. the oil fund mechanism curbs the effects of oil price fluctuations on demand and output – as well as on inflation and the krone exchange rate. the government pension fund global is also an important source of funding for public spending in the next decades. reductions in government welfare spending, which will probably be a matter of necessity with an increasingly ageing population, will be smaller than would have been the case without the fund. 5. challenges to the norwegian economy in the period 1992 – 2008 the norwegian economy experienced a long upturn. in the 2000s, the cost level started to rise, partly reflecting a sharp improvement in our terms of trade. prices for norwegian goods, such as oil, gas, metals, minerals and fish increased sharply