svein gjedrem : norwegian monetary policy in the age of the euro speech by mr svein gjedrem, governor of norges bank, at the conference on emu and the euro hosted by the european commission, euro - info centre and nho ( confederation of norwegian business and industry ), oslo, 30 october 2001. please note that the text may differ slightly from the actual presentation * * * introduction welfare and prosperity in norway rely on the free movement of goods, services, capital and knowledge. the eu accounts for about 80 per cent of norway's foreign trade. by virtue of the eea agreement, norway is part of the internal market. the norwegian economy is interwoven with european economies. this has also been reflected in norway's monetary policy throughout much of the post - war era. monetary policy's most important task is to provide a nominal anchor for the economy. since the second world war, there have been several monetary policy reforms in norway. in the period between 1972 and 1986, monetary policy was to a limited extent focused on curbing the effects of cost shocks on prices. during this period, inflation was high and variable. consumer prices rose almost twice as much as in germany. at the same time, the krone's value against the german mark was almost halved. from 1986 to 1992, norway operated a fixed exchange rate regime. the fixed exchange rate was the anchor for inflation in norway. the difference between inflation in norway and germany narrowed substantially. from 1986 to 1990, monetary policy was oriented towards maintaining a fixed exchange rate against a trade - weighted basket of currencies. in 1990, the krone was pegged to the european currency unit, the ecu. the peg was abandoned in december 1992 when international currency turbulence compelled norway and several other countries to discontinue the fixed exchange rate system against the ecu. however, monetary policy was still geared towards maintaining a stable krone exchange rate against european currencies. the ecu was used as the main reference for european currencies. the euro took over this role when it was introduced on 1 january 1999. developments since the beginning of 1997 indicated that the exchange rate was no longer an appropriate operational target of monetary policy. norges bank therefore placed increasing emphasis on low and stable inflation as a precondition for exchange rate stability. in our opinion, the best contribution monetary policy could make to a stable krone exchange rate against the euro was low and stable

inflation in line with inflation in the euro area. monetary policy was therefore oriented towards bringing inflation over time into line with that aimed at by the european central bank. guidelines for economic policy in norway on 29 march, the government issued new guidelines for monetary policy. monetary policy shall now be oriented towards low and stable inflation. the operational target of monetary policy is consumer price inflation of 2½ per cent. at the same time, new guidelines for fiscal policy were drawn up, providing for the use of petroleum revenues over the central government budget equivalent to the expected real return on the government petroleum fund. the new guidelines for monetary policy did not entail any significant change in the conduct of monetary policy. quantifying an inflation target, in line with international practice, has made it easier to explain and understand norwegian monetary policy. the implementation of monetary policy monetary policy influences the economy with considerable and variable lags. our analyses indicate that a substantial share of the effects of an interest rate change occurs within two years. two years is thus a reasonable time horizon for achieving the inflation target of 2½ per cent. the effects of interest rate changes are uncertain. in addition, it may be difficult to assess the current situation. different indicators may point in various directions and economic statistics are normally published with a lag. this suggests that a gradualist approach to setting interest rates is appropriate. we will then acquire new knowledge and can adjust interest rates underway. if evidence suggests that inflation will be higher than 2½ per cent with unchanged interest rates, the interest rate will be increased. if it appears that inflation will be lower than 2½ per cent with unchanged interest rates, the interest rate will be reduced. there is symmetry here. it is just as important to avoid an inflation rate that is too low, as it is to avoid an inflation rate that is too high. economic policy in the euro area the introduction of the euro on 1 january 1999 also meant the introduction of a single monetary policy in the eleven member countries. greece joined as the twelfth country on 1 january 2001. the population of the euro area is a little more than 300 million and the euro area economy accounted for about 16 per cent of world gdp last year. 1 price stability is the primary objective of the single monetary policy in the euro area. the governing council of the european central bank has defined price stability as a year - on - year increase in the harmonised index of consumer prices ( hicp ) for the euro area of below 2 per cent. the project