euro area countries. a high rise in prices and costs will in itself fuel depreciation expectations. monetary policy must therefore be oriented with a view to bringing price and cost inflation in norway down to the inflation target in europe. as illustrated in the chart, price inflation in norway has been about 1 % higher than in euro area countries over the last two years. wage growth differentials are even wider. in this situation, pressures in the economy require a relatively tight monetary policy, as is the case today. second, interest rates must not be set at such high levels that monetary policy contributes to economic downturns that undermine confidence in the krone. if unemployment rises sharply, market operators may perceive the exchange rate as being overvalued and that employment can be boosted by improving business sector competitiveness. this would tend to fuel depreciation expectations. a tightening of monetary policy in such a situation would not be credible, and might trigger renewed speculation against the krone. this mechanism came into evidence during the currency crisis in the autumn of 1992. when both fiscal policy and monetary policy are oriented with a view to influencing the domestic economy, it is important that the two components of economic policy are complementary. however, there is a risk that a situation may arise where norges bank maintains a high interest rate level based on its evaluation of the economic outlook, while the government authorities increase spending in order to stimulate employment. this is a genuine dilemma. in view of its mandate and responsibilities, the best way for norges bank to address this challenge is probably to promote transparency in its analyses and reaction patterns so that the government authorities can take into account the implications for norges bank ’ s setting of interest rates when decisions concerning the government budget are taken. the objective of monetary policy and norges bank ’ s remit are drawn up by the political authorities. for monetary policy to be successful, it is vital that fiscal policy plays an effective role. in the short term monetary policy can influence developments in the real economy. norges bank can do this through two channels. first, norges bank will proceed gradually when the krone ’ s value moves outside the initial range and instruments are oriented to returning it to this range. we seek to avoid a situation whereby monetary policy contributes to abrupt shifts in the economy. second, developments in the labour market and product markets influence wage growth and inflation, and thereby the krone exchange rate. norges bank takes this into account when evaluating economic developments and when setting interest rates

of the krone. the latter would be the least painful channel, and with a flexible exchange rate it is also the most likely. final remarks to sum up, increased globalisation and the ensuing terms of trade improvements have exposed the norwegian economy to a significant upward income shock. this has amplified the domestic upswing. so far, however, strong growth impulses have not led to major imbalances in the labour market or strong upward wage and price pressures. this may be seen as an indication that our fiscal and monetary policy guidelines have been quite successful so far in shielding the norwegian economy from excessive fluctuations. in principle, these policy guidelines are just as appropriate for coping with favourable periods as with adverse periods. we will face another test of the macroeconomic framework when the terms - of - trade change is reversed and the gains either fully or partly dissipate. structural policies aimed at maintaining flexibility in labour, capital and goods markets are, however, probably more important than stabilisation policy to sustain both high growth and economic stability in the future. developments in labour productivity over the last two decades may be an indication of the importance of structural policies. norway has managed to sustain productivity growth at a high level. restructuring in the norwegian economy in the 1990s, changes in the tax system, broader and deeper financial markets, and deregulation in trade and service markets appear to have resulted in a more efficient use of resources. many of these changes were advocated by victor norman in the 1980s and early 1990s. for example, in 1991 he chaired an official committee 5 exploring possible efficiency gains in the government sector. in the report, high possible efficiency gains were envisaged as a consequence of the committee ’ s proposals, including a better functioning labour market. victor ’ s conviction as to what economic policy can accomplish can be illustrated by the following quote from the committee ’ s report : " we believe that in principle it should be possible to once again reduce unemployment in norway to one per cent without creating permanent pressures and restructuring problems in the economy. " thank you for your attention! see nou 1991 : 28, ” mot bedre vitende? effektiviseringsmuligheter i offentlig sector ” ( only available in norwegian ).