øystein olsen : monetary policy and financial stability considerations speech by mr øystein olsen, governor of norges bank ( central bank of norway ), at the european banking & financial forum, prague, 27 march 2012. * * * the text below may differ from the actual presentation. this speech does not contain assessments of the current economic situation or interest rate setting. introduction the past few years have clearly shown the costs of financial instability. the near collapse of the financial system in autumn 2008 led to the most severe economic downturn of our time. there was a dramatic decline in international trade, and total world output fell from one year to the next for the first time in generations. when financial markets failed, the authorities had to intervene. bailout packages for banks shifted debt from private to public hands. governments increased spending in order to curb the fall in activity. many countries are now trying to rein in large deficits and rising government debt under difficult conditions. pension rules and tax systems are under review. the costs of such structural reforms would have been lower in good times. a financial crisis has to be met with appropriate measures, but the main objective in our work on financial stability must be to reduce the risk of crises emerging. history tells us that a financial crisis typically arises when debt has accumulated over a long period. an important task is therefore to contain the buildup of imbalances and secure a robust financial system. a decade of inflation targeting the norwegian economy emerged quickly and fairly painlessly from the recent global economic downturn. since 2001, economic policy in norway has been guided by a fiscal rule and a flexible inflation target. with solid government finances based partly on petroleum revenues and firmly anchored inflation expectations, there was room for manoeuvre both in monetary and fiscal policy when the financial crises hit. inflation in norway is currently low, but it has been close to target over the past decade. during this period, monetary policy has faced demanding trade - offs, and the application of judgment has been put to a test. we have gradually learned more about the functioning of our economy under an inflation targeting regime. let me touch upon some of these insights. fairly soon after we had adopted inflation targeting, we learned how demanding it may be to strike a balance between different monetary policy considerations in a small open economy. when the key policy rate is raised to restrain a pronounced rise in domestic inflation, it may strongly impact the exchange rate, as we experienced in the period 2002 – 2003. both the real

and ensure that workers are available to fill them. yet, even in this economy, some jobs go unfilled because individuals lack the necessary skills. skill gaps could constrain long - term employment growth. indeed, some 88 million americans have at least one educational barrier, such as no high school degree, no postsecondary training, or deficient english language skills. and, as i noted, longer average duration of unemployment may be eroding the skills of the jobless. 5 while broad investments in human capital and workforce development are clearly needed, it is not easy to determine how to ensure that those investments are effective and costefficient. the federal reserve system is engaged in ongoing research to identify best practices and establish methods for measuring the success of workforce development programs. for example, the system ’ s community affairs function studied various workforce development needs and responses as part of its examination of the impact of concentrated poverty on lower - income individuals. in its report, the enduring challenge of concentrated poverty in america, published in 2008, findings from 16 case studies confirmed that a skilled labor force is a key attraction for other drivers of community success, including lower crime rates, outside investment, and access to employment. as a result, many of the case study communities actively promote strategies that address barriers to work and connect adults to employment opportunities. 6 among the successful strategies identified in the concentrated poverty case studies, the report noted that community colleges have effectively filled educational gaps in communities where limited educational attainment among residents and insufficient job readiness were particularly pronounced. in cleveland, for example, residents who once worked in manufacturing lacked the necessary skills to obtain other available jobs, particularly in the growing health care sector. to address this problem, the cuyahoga county community college designed an innovative program to help individuals with limited formal education enter health care through a nursing assistant training program. the program offers both immediate employment opportunities and the potential for additional credentials necessary to advance to other jobs along the occupational ladder. in el paso, texas, the community developed project arriba, a labor market intermediary that provides clients with training through el paso community college. the training focuses on the skills necessary for local job demands in fields such as health care, education, and information technology. more recently, economists at the federal reserve bank of st. louis conducted a study of the effectiveness of community colleges in advancing the economic well - being of students and see beth siegel and karl seidman ( 2009 ), “ the economic