5 percent, the capitalized value of irrigated farmland in eastern nebraska could fall by a third to $ 3, 300 per acre ( chart 3 ). if capitalization rates would rise to 10 percent as they did during the 1980s farm crisis, land values could drop by half. additional analysis suggests that other regions face similar interest rate risks. rising interest rates could also cut farmland values by reducing farm revenues. higher interest rates tend to raise exchange rates, which limits agricultural exports, in turn depressing commodity prices and farm revenues. in 1981, the spike in real interest rates led to higher exchange rates and contributed to lower agricultural exports. with falling exports, commodity prices and farm revenues dropped, which pushed farmland values to their 1985 lows. if a similar event occurred today, farmland values could fall. for example, if capitalization rates return to their historical average and corn prices drop to $ 4 per bushel, their 2009 average, irrigated land values in eastern nebraska could fall almost 50 percent to $ 2, 700 per acre ( chart 4 ). other regions face similar risks. in sum, rising interest rates could trigger a sharp decline in farmland values. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches

0 interest rate differential, ( left - hand scale ) 2. 5 2. 0 twi ( right - hand scale ) 1. 5 1. 0 jan 99 jul 99 jan 00 jul 00 jan 01 jul 01 jan 02 jul 02 jan 03 1 ) trade - weighted effective exchange rate ( twi ). a rising value denotes an appreciating rate source : norges bank sg gausdal 31. 01. 03 the main explanation for the wide interest rate differential is not that interest rates are high in norway, but that interest rates are at a historic low abroad. for example, interest rates have not been at such a low level in the us since the 1960s. foreign interest rates have been reduced markedly to counter a downturn, while norway has featured labour shortages, high income and consumption growth and a more normal interest rate. low volatility in foreign exchange markets has probably amplified the effect of a wide interest rate differential. furthermore, equity prices have shown a pronounced decline over close to 2½ years and investors have been seeking alternative investment vehicles. the appreciation of the krone in the first half of last year gradually changed the inflation outlook. in isolation, this implied a reduction in interest rates. however, the norwegian economy was also exposed to high pay increases last spring, which had the opposite effect. in this situation, if monetary policy were to give priority to short - term inflation considerations, we could perhaps have reduced the interest rate last summer. but this would have led to fluctuations in output and employment. household and enterprises might have continued to increase their borrowing. in addition, we might have been confronted with waning confidence in financial markets and a weaker krone. once the effects of high wage growth had fed through to prices and pushed up inflation, the interest rate would have been raised irrespectively, perhaps to a higher level than has been the case. the end result of such a policy would have been wider fluctuations in aggregate demand, output and employment. as the inflation target gains confidence and credibility also among the social partners, the interest rate will make an even greater contribution to stability in the real economy. overall employment is influenced by wage formation. monetary policy cannot prevent an increase in unemployment that is caused by a wage - driven cost shock. output gap for the euro area, the oecd countries and norway. per cent of trend gdp norway1 ) oecd countries - 1 - 1 euro area - 2 - 2 - 3 - 3 - 4 - 4 -