is probably the difficulty of distinguishing between changes in the quality and price of goods. in other countries, findings show that the consumer price index overestimates actual inflation to the order of ½ - 1 percentage point. the inflation target represents a framework for, not an obstacle to, monetary policy ’ s contribution to stabilising output and employment. this objective is also expressed in the regulation on monetary policy. if demand for goods and services is high and there is a shortage of labour, there will normally be prospects of higher inflation. when interest rates are increased, demand falls and inflation is kept at bay. if demand is low and unemployment rises, there will be prospects of lower inflation. the interest rate will then be lowered. in the long run, output is determined by the supply of labour and capital and by the ability to adapt, but in the short and medium term monetary policy can also have an impact on the real economy. the economy grows over time. output moves in waves. output will in some periods lie below long - term trend growth and in others above trend. the difference between trend output and actual output is called the output gap. stabilising output growth means seeking to maintain actual output near trend. we have had pronounced economic cycles in the norwegian economy. the downturn at the beginning of the 1990s was followed by an upturn from 1993. this upturn peaked in 1998. the economy then shifted from an upturn with high growth rates to an expansion with lower growth but low unemployment, labour shortages in many sectors and strong growth in labour costs. since 1998, output growth has been low. growth stalled in winter 2002 and was well below capacity in the first half of 2003. growth in the norwegian economy has since picked up. norges bank has not defined an exchange rate target. nevertheless, developments in the krone are of considerable importance to interest - rate setting because exchange rate developments have an impact on inflation and output. the krone fluctuates. this is not surprising because other countries ’ currencies also fluctuate. exchange rate fluctuation is a structural feature of open economies like norway that have their own currency. the norwegian krone does not stand out as particularly unstable. on the contrary, in countries like sweden, the uk, switzerland, australia, canada and new zealand, exchange rate fluctuations are as wide - or wider - than in norway. there is a cost involved for businesses in hedging against fluctuations in the krone. however, a

sector negotiations can take into account that the higher pay increases are, the fewer people that can be paid over government budgets. the interaction here became clear when public sector employment fell after the expensive wage settlement in 2002. in the years following 1997, with strong growth in public expenditure, the fiscal rule pointed to a continued increase in the use of petroleum revenues. we had to expect that this increase would lead to a deterioration in the competitive position of norwegian manufacturing, either through higher wages or through an appreciation of the krone exchange rate, and with norway ’ s relatively higher wage growth, competitiveness has been weakened by approximately 15 per cent since the mid - 1990s. the krone exchange rate has been influenced by high oil and gas prices and prices for other norwegian export goods. monetary policy has also influenced the path for norway ’ s relative costs, but the nominal value of the krone is about the same as ten years ago. strong growth in public expenditure and expectations of moderately higher growth in the use of petroleum revenues now seem to have been factored into the cost level. even at the beginning of the oil age in norway in the early 1970s, the relationship between the use of petroleum revenues and changes in industry structure was raised as an issue. manufacturing industry was scaled back in waves in the course of this period. the last wave occurred around the turn of the millennium, but a substantial decline also occurred in the periods 1977 to 1984 and 1987 to 1992. prior to these periods, the manufacturing sector ’ s competitiveness deteriorated. today, about 55, 000 fewer persons are employed in manufacturing than was the case in 1998. the share of our imports that can be covered by current petroleum revenues and some of the petroleum fund will gradually diminish. competitiveness must therefore be improved. competitiveness may have to return to a level we have not experienced since petroleum production began. rough estimates indicate that the real exchange rate that safeguards the balance of trade when norway ’ s oil wealth no longer has the same weight in the economy will be more in line with the real exchange rate we had in the 1960s. thank you for your attention. 7 / 7