central bank reduces the key policy rate, but by less than the decrease in interest rates abroad. as a result, the krone appreciates. this leads in the short term to lower activity and inflation, but a lower key policy rate and slightly lower bank lending rates will gradually result in higher capacity utilisation and higher inflation. borrowers, however, only experience a limited reduction in bank lending rates because of the assumed rise in bank lending margins. somewhat lower interest rates and higher output nonetheless result in increased credit growth. what if capital requirements had not been tightened? the results in this scenario are indicated by the blue lines in the chart. without higher capital requirements, banks ’ lending margins would have been more stable. for a more detailed description of the improved version of nemo, see brubakk, l. and p. gelain ( 2013 ) : “ nemo – a monetary business cycle model with financial frictions ”. forthcoming in the norges bank staff memo series. see for example bernanke, b., m. gertler and s. gilchrist ( 1999 ) : “ the financial accelerator in a quantitative business cycle framework. ” handbook of macroeconomics, elsevier, pp. 1341 – 1993. bis central bankers ’ speeches lower interest rates abroad suggest a reduction in the key policy rate. bank lending rates largely track the key policy rate. this leads to higher demand and output and accelerating debt growth. these factors suggest that the reduction in the key policy rate should now be smaller than in the scenario involving increased capital requirements and higher lending margins. as a result, the appreciation of the krone is more marked, and inflation will deviate more widely from the target. the effects on capacity utilisation and credit growth are also slightly more pronounced. in simplified terms, it can be said that without higher capital requirements, monetary policy trade - offs become more demanding and economic developments somewhat less balanced. the model example illustrates a general point. when several instruments are available in economic policy, several goals can be achieved at the same time. stricter capital requirements could influence monetary policy in a number of ways. first, a tightening of capital requirements would counteract the build - up of financial imbalances. second, the countercyclical buffer could cushion the adverse effects of a future downturn on bank lending. third, higher levels of equity capital will increase banks ’ resilience and thereby reduce the likelihood of financial crises. the example also sheds light on conditions

and seeks to stabilise economic developments in the short and medium term will also contribute to promoting regional development. long - term economic developments consumer prices and economic growth in norway and sweden moved on a fairly similar path during the years around the dissolution of the union and up to the beginning of the 1970s. there are several reasons for this. first, we have been part of and been influenced by the same international business cycles. second, we have close trade relations, even if there were setbacks during the interwar period and the two world wars. third, both countries participated in various fixed exchange rate systems for long periods. after world war ii, we adhered to the international fixed exchange rate system bretton woods. during the period 1900 to 1970, the norwegian and swedish economy grew at an average annual rate of 3. 2 and 3. 3 per cent respectively. with norway ’ s emergence as an oil nation, a change occurred. the norwegian economy continued to grow at about the same pace. from 1970 to date, the norwegian economy has expanded by an report no. 39 ( 1983 ) : act on norges bank and the monetary system annual average of 3. 4 per cent. the development of the petroleum sector and the use of petroleum revenues contributed to relatively high growth also in the mainland economy. in sweden, however, growth fell to an annual average of 2 per cent. business sector competitiveness in norway after norway became an oil nation, competitiveness in the business sector in norway deteriorated in relation to sweden. first, wage growth in norway has been somewhat higher than in sweden. second, the value of the norwegian krone against the swedish krona has appreciated sharply. the rise in labour costs in local and common currency was particularly high in the mid - 1980s and after 1997. hourly labour costs for a swedish manufacturing worker were on average 8 per cent higher than for a norwegian manufacturing worker in 1980 measured in common currency. in 2004, however, hourly labour costs for a swedish manufacturing worker was almost 20 per cent lower2. competitiveness in norway ’ s manufacturing industry is now close to 20 per cent weaker than the average for the past 30 years. norwegians had to pay close to 138 norwegian kroner for 100 swedish kronar in 1970. today, we only have to pay a little more than 90 norwegian kroner. the appreciation of the norwegian krone has made it less expensive to buy goods and services in sweden. during longer periods, the exchange rate seems to have been