Monetary Policy
Experiences and future challenges for a small
oil-producing country
Presentation at the workshop “Exchange rate strategies for
developed open economies in the new millenium”, Reserve Bank of
New Zealand, 19 February 2002
Ingvild Svendsen
Monetary Policy Department
Norges Bank
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
Petroleum production on the Norwegian
continental shelf. In millions of Sm3 o.e.
350
350
300
300
250
250
200
200
Crude
oil
150
150
100
100
50
0
1970
Gas
1980
1990
2000
2010
Source: Ministry of Finance (Long Term Programme 2002-2005)
ISv Reserve Bank of New Zealand 19 Feb 02
2020
50
0
2030
Monetary Policy
Total export from Norway, 2000
Petroleum
Shipbuilding
Misc. manufacturing
Services
Fish
Process industry
Traditional
export
Source: Statistics Norway
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
Exchange rate regimes in Norway
December, 1978
Interest rate regulation,
trade weighted baskets
May, 1985
Interest rate set by Norges Bank,
fixed exchange rate from 1986
October, 1990
December, 1992
Linked to ECU
Floating krone
May, 1994
Stability against European currencies
Increasing weight on low and stable inflation
March, 2001
Inflation target (2.5 per cent)
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
Nominal effective exchange rate. Norway
1990 = 100. Månedstall. 1970-2001
130
130
Fixed exchange
rate
Apreciation -->
120
Stability against
European
currencies
120
110
110
100
100
90
90
80
80
70
70
78
83
Sources: Norges Bank and Datastream
ISv Reserve Bank of New Zealand 19 Feb 02
88
93
98
Monetary Policy
A twin surplus
per cent of GDP
Current account balance
Fiscal surplus
16
12
8
4
0
-4
1998
ISv Reserve Bank of New Zealand 19 Feb 02
1999
2000
2001
2002
Monetary Policy
The Norwegian Government Petroleum Fund
(1990-)
• Objective: To manage assets and distribute wealth
between generations
• To serve as a buffer against terms of trade shocks
• Transfers the amount necessary to produce a balanced
government budget
• Invests the surplus entirely in foreign markets
• Managed by Norges Bank
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
Petroleum activities in 2001
MAINLAND ECONOMY
Demand for
Norwegian goods and services
(USD 3,9 billion)
PETROLEUM ACTIVITIES
Use of petroleum revenues
(USD 0,6 billion)
Government net
cash flow
(USD 24,7 billion)
PETROLEUM FUND
Interest and dividends
(USD 1,8 billion)
Export revenues oil and gas
(USD 34,1 billion)
Financial investments abroad
(USD 25,9 billion)
FOREIGN SECTOR
Source: Ministry of Finance (RNB2001)
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
Volatility in terms of trade and exchange
rates. St. deviation (per cent) of monthly changes in exchange rates,
1997-2000, and st. deviation (per cent) of annual changes in terms of
Volatility in exchange rates
2,5
trade, 1980-2000.
Australia
New Zealand
2,0
UK
1,5
Sweden
Canada
Mainland Norway
Norway
1,0
1
2
3
4
5
6
7
Volatility in terms of trade
Sources: Eco Win and OECD
ISv Reserve Bank of New Zealand 19 Feb 02
8
9
10
Monetary Policy
Nominal effective exchange rate
- stability in the medium term
130
130
Norge
Kanada
Sverige
Australia
New Zealand
Sveits
120
120
110
110
100
100
90
90
80
80
70
70
90
91
92
93
94
Sources: Norges Bank and Datastream
ISv Reserve Bank of New Zealand 19 Feb 02
95
96
97
98
99
00
01
Monetary Policy
Government Petroleum Fund
Capital in per cent of GDP
140
120
100
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Ministry of Finance
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
The Government's Long-Term Programme 2002-2005
New guidelines for economic policy
• Fiscal policy:
- new rule for the use of petroleum revenues:
- continued focus on smoothing fluctuations in
the economy
• Monetary policy:
- inflation target
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
Strategy for the use of petroleum revenues
(endorsed by the Parliament June 2001)
• The use of petroleum revenues over the Government
budget is to be increased moderately and gradually,
approximately in line with an estimated 4 per cent
real return on the capital of the Petroleum Fund
• Emphasis will still be given to stabilise economic
fluctuations (?)
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
Structural non-oil budget deficit.
In per cent of GDP Mainland Norway
10
10
8
8
6
6
Use of petrolum revenues
4
4
2
2
0
0
2000
2010
Source: Ministry of Finance
ISv Reserve Bank of New Zealand 19 Feb 02
2020
2030
2040
2050
Monetary Policy
Key rates and rise in labour costs
Interest rates
Per cent
8
Norway
6
New Zealand
Australia
Sweden
Euro area
4
Canada
2
UK
Denmark
US
Japan
0
0
ISv Reserve Bank of New Zealand 19 Feb 02
2
4
Rise in labour costs, 1998-2000
6
8
Monetary Policy
Signs of Dutch disease: Employment by sector
Per cent of total employment
30
30
Public sector
20
20
Manufacturing
10
10
0
0
1970
1975
Source: Statistics Norway
ISv Reserve Bank of New Zealand 19 Feb 02
1980
1985
1990
1995
2000
Monetary Policy
Structural effects on the Norwegian economy
• Use of petroleum revenues will entail some changes
in the industry structure
• Increased spending on private and public services:
Sheltered sector lay claim to a higher share of
available employment
• Resources have to be transferred from the exposed
sector
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
Adjustments through real appreciation
• Adjustments through deteriorating competitiveness
•
•
•
•
•
and profitability in internationally exposed industries
Pressures on economic resources may lead to higher
wage and price inflation
Must be countered by tighter monetary policy
Higher interest rate may result in nominal
appreciation => deteriorating competitiveness
Not everyone will be equally enthusiastic …
… but monetary policy shall no in this situation
counter the strong exchange rate.
ISv Reserve Bank of New Zealand 19 Feb 02
Monetary Policy
• APPENDIX:
ISv Reserve Bank of New Zealand 19 Feb 02