jan f qvigstad : contribution at the conference on “ welfare effects of financial innovation ” comments by mr jan f qvigstad, deputy governor of norges bank ( central bank of norway ), on mr frank smets ( ecb ) paper “ financial markets – productivity, procyclicality, and policy ”, at the netherlands bank conference in honour of mr nout wellink on “ welfare effects of financial innovation ”, amsterdam, 11 november 2011. * * * i would like to thank birger vikøren, sigbjørn atle berg and helle snellingen for useful comments. thank you for inviting me and giving me the opportunity to comment on frank ’ s paper. the common starting point of the literature is that the value of financial markets lies in their contribution to real economic growth. this is the perspective we always need to have for any meaningful discussion of the social value of financial markets. a well developed financial market is not a goal in its own right. during my 30 years of service in the treasury and the central bank, i have had my fair share of dealings with banking and financial crises. i will draw on some of that experience in my comments today as part of my modest contribution to this distinguished group. in the aftermath of the lehman brothers collapse the funding situation for banks became difficult, also for norway with its oil - driven economy. early in 2009 a swap arrangement was introduced to improve the medium - term funding situation for our banks. government bonds were swapped for covered bonds issued by banks and normal lending activity was restored. however, this was not the first time the government had used swaps to stimulate the real economy. we did so around 200 years ago... a swap of government bonds for privately issued securities was used already in 1819 when norway emerged on the scene as a sovereign country after the napoleonic wars. the 1819bonds were swapped for bills of exchange issued by farmers and merchants in the domestic market. with these bonds as collateral they managed to raise sufficient credit to import seed to secure important supplies to farmers and merchants in this difficult period in norwegian economic history. this is a historical example of how financial markets underpin economic growth. bis central bankers ’ speeches more generally, financial markets contribute to economic growth in three ways : they create credit to make it available for real investment. they allocate credit to the most profitable investment projects. and they improve risk sharing in the economy. the caveat is that they create

for growth next year rather than a significant drag, as has been the case for the past several years. prospects for nonresidential construction are poor, however, given weak fundamentals and tight financing conditions. in the business sector, manufacturing activity has been expanding and should be helped by the continuing strength of the recovery in the emerging market economies, especially in asia. as the recovery takes hold, enhanced business confidence, together with the low cost of capital for firms with access to public capital markets, should lead to a pickup in business spending on equipment and software, which has already shown signs of stabilizing. i have discussed two of the principal factors that may constrain the pace of the recovery, namely, restrictive bank lending and the weak job market. banks'reluctance to lend will limit the ability of some businesses to expand and hire. i expect this situation to normalize gradually, as improving economic conditions strengthen bank balance sheets and reduce uncertainty ; the fallout for banks from commercial real estate could slow that progress, however. jobs are likely to remain scarce for some time, keeping households cautious about spending. as the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time. nevertheless, as net gains of roughly 100, 000 jobs per month are needed just to absorb new entrants to the labor force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as i expect. the outlook for inflation is also subject to a number of crosscurrents. many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities. although resource slack cannot be measured precisely, it certainly is high, and it is showing through to underlying wage and price trends. longer - run inflation expectations are stable, having responded relatively little either to downward or upward pressures on inflation ; expectations can be early warnings of actual inflation, however, and must be monitored carefully. commodities prices have risen lately, likely reflecting the pickup in global economic activity, especially in resource - intensive emerging market economies, and the recent depreciation of the dollar. on net, notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time. the foreign exchange value of the dollar has moved over a wide range during the past year or so. when financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. more recently, as financial