long - term growth path. a prominent feature of this type of model is that the behaviour of different economic agents is modelled explicitly. each model parameter therefore has its own economic interpretation. households maximise utility and choose the optimal distribution between work and leisure and between consumption and saving. firms maximise profit. the authorities have defined specific economic policy objectives. the first dsge models were developed in the early 1980s, and were closely linked to real business cycle theory which kydland and prescott pioneered. these models included elements of classical theory such as perfect competition, flexible prices and market clearing. a main thesis of real business cycle theory is that not only is long - term economic growth, but also the business cycle, driven from the supply side, specifically by an uneven development in technology. lags in the economy were linked to real variables in these models, for example that it takes time to install new capital. a result of this theory was that stabilisation policy is superfluous. the one - sided focus on technology shocks as a driving force of the business cycle drew criticism from many economists. the dsge models have been further developed over the past decade and they have gained a more prominent role. important additions are keynesian elements such as monopolistic competition and nominal rigidities. monopolistic competition means that firms have market power and set prices as a mark - up on their marginal costs. in the more recent dsge models, prices and wages are also rigid in the short term, partly reflecting contracts and costs associated with price adjustments. these two assumptions imply that production is determined by demand in the short term and that monetary policy affects the real economy. therefore, more recent dsge models have features that combine elements of both neoclassical and keynesian models. this body of theory is often referred to as the “ new neoclassical synthesis ”, but these types of models are also frequently called “ new keynesian ”. the long - term properties of the models can be qualified as classical : monetary policy can only influence nominal variables, while production is determined by technology, preferences and the supply of factor inputs. in the short term, the model has keynesian features : production is determined by demand. monetary policy can influence production and employment because it takes time to change prices and wages. nemo will be quantified so that it reflects our perception of the central mechanisms that apply to today ’ s economy. in this process, we must combine our overall theoretical and empirical insight. econometrics and other empirical

svein gjedrem : the labour market, business cycles and monetary policy speech by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the annual conference for managers of small and medium - sized enterprises ( smb - dagen ), bergen, 27 september 2007. the text below may differ slightly from the actual presentation. the address is based on the assessments presented at norges bank ’ s press conference following the executive board ’ s monetary policy meeting on 26 september and in monetary policy report 2 / 07. * * * monetary policy is oriented towards low and stable inflation. the operational target of monetary policy is consumer price inflation of close to 2½ per cent over time. the objective of low and stable inflation provides the economy with a nominal anchor. this means that all economic agents – households and enterprises, whether large or small – can plan ahead on the assumption that inflation is, and will continue to be, low and stable. in a small, open and decentralised market economy like norway, and with our particular industry structure, there will be cyclical fluctuations. when economic agents are confident that inflation will be low and stable over time, the interest rate can also be set with a view to dampening the fluctuations somewhat. the labour market plays an important role in the effect on inflation of the key policy rate, which is the instrument of monetary policy. first, as interest rates rise, household and local government consumption and investment will tend to fall. lower demand leads to lower output and employment. wage growth may slow. lower wage growth combined with lower profit margins will result in more subdued inflation. second, the effect of interest rate changes may be amplified because the interest rate also affects the krone exchange rate. when the interest rate was lowered in 2003, borrowing increased and investment in nok declined, leading to a depreciation of the krone. a weaker krone results in higher exports and improved profitability in norwegian business and industry. this normally leads to higher employment, and a rise in wage growth and inflation. third, inflation expectations will also influence wage demands and have an effect when companies adjust their prices. it may be difficult to perceive how expectations are generated. confidence in the inflation target may provide an anchor. the labour market is also exposed to other disturbances that may have an effect on employment, wage growth and thereby inflation. such disturbances influence the orientation of monetary policy. disturbances that result in a tight labour market and high capacity