will result in an appreciation of the krone, and a lower interest rate will weaken the krone. however, this relationship presupposes that the market is confident that monetary policy provides the economy with a nominal anchor. in some situations, interest rate changes may have the opposite effect. a higher interest rate can weaken the krone if it contributes to a deflationary recession, and a lower interest rate can strengthen the krone if it contributes to preventing a deflationary recession. the interest rate only has a predictable effect on the krone exchange rate when it affects price inflation in the right direction. the interest rate functions in different ways in our two economies. there are also other dissimilarities between the functioning of our respective economies and between our institutional frameworks which may shed some light on the differences between our monetary policy regimes : • denmark has a long history of a fixed exchange rate which inspires credibility ; • denmark ’ s membership of erm ii provides exchange rate policy with an institutional anchor ; • denmark has more stable terms of trade than norway. moreover, there is strong and well - deserved confidence in the ability of fiscal policy to stabilise economic growth in denmark. the most substantial changes in the norwegian terms of trade are due to fluctuating oil prices. variations in denmark ’ s terms of trade are negligible. in this sense the norwegian economy has more in common with countries like new zealand and australia, which are also large exporters of commodities. a substantial change in the terms of trade translates into considerable changes in these countries ’ earnings and balance of payments. over the years this has resulted in sizeable exchange rate fluctuations. the exchange rate is a buffer against changes in the terms of trade. while a country like denmark has maintained a stable exchange rate, commodity - producing countries typically experience fluctuations in the exchange rate in tandem with changes in the terms of trade. in new zealand, australia and many other countries monetary policy is oriented directly towards price stability, and these countries permit short - term fluctuations in the exchange rate. this means that monetary policy bears the primary responsibility for price stability, whereas fiscal policy is to a greater extent oriented towards long - term stability in government finances. in norway, the government petroleum fund acts as a buffer against fluctuations in petroleum revenues. this makes the norwegian economy more robust and in the short term less dependent on oil, at least as long as the government budget is running a substantial surplus. the government petroleum fund is norway ’ s most

next. a large portion of the revenues is saved, and is invested in foreign equities and bonds through the government petroleum fund. long - term fiscal policy challenges - the role of the government petroleum fund nevertheless, the norwegian economy is facing considerable challenges as a result of an ageing population and a marked rise in pension expenses and in the cost of nursing and care services. the number of old - age and disability pensioners is estimated to rise by 50 % by 2030, and central government expenditure on old - age and disability pensions is expected to increase from approximately 7 % of gdp in 2000 to 15 % in 30 years ’ time. in order to meet these long - term fiscal policy challenges, it is appropriate for resources to be put aside in times of high petroleum revenues. the larger the petroleum fund, the less dependent we will be on petroleum revenues in the future. the norwegian ministry of finance assesses the long - term outlook for public expenditure using generational accounts. 1 such accounts can be used to assess whether the tax burden will need to be increased in the future to meet the government ’ s long - term social security obligations and to maintain public services and amenities. the calculations presented by the ministry of finance2 indicate that the generational accounts are more or less balanced. the ministry emphasises the uncertainty shrouding this type of long - term assessment of fiscal policy. fluctuations in the oil price and petroleum earnings also create challenges for economy policy in the short and medium term. let us suppose that the oil price temporarily increased by usd 1 per barrel. this is a small change, well within normal variations from one year to the next. government revenues - and thus the budget surplus - would increase by almost 1 % of norway ’ s annual gdp. if the increase in petroleum revenues is used in norway, it corresponds to almost half of the annual growth in the non - oil economy in a normal year. if the private sector of the economy is also expanding, and the economy is already close to capacity, this policy would swiftly lead to strong pressures on the resources in the economy. this would result in a rise in wages and prices, and would also lead to unstable conditions in the foreign exchange market. the government petroleum fund shall serve as a buffer against short - term fluctuations in oil revenues. as large portions of the revenues from oil activities accrue to the state, fluctuations in oil prices and oil revenues will primarily result in changes in allocations to the petroleum fund. since all of the capital