ISv Reserve Bank of New Zealand 19 Feb 02 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 Source: Ministry of Finance (Long Term Programme ) Crude oil Gas Petroleum production on the Norwegian continental shelf. In millions of Sm 3 o.e.

ISv Reserve Bank of New Zealand 19 Feb 02 Monetary Policy Total export from Norway, 2000 Traditional export Source: Statistics Norway

ISv Reserve Bank of New Zealand 19 Feb 02 Monetary Policy Exchange rate regimes in Norway December, 1992 December, 1978 October, 1990 Interest rate regulation, trade weighted baskets Linked to ECU Floating krone Stability against European currencies May, 1994 March, 2001 Inflation target (2.5 per cent) Increasing weight on low and stable inflation May, 1985 Interest rate set by Norges Bank, fixed exchange rate from 1986

ISv Reserve Bank of New Zealand 19 Feb 02 Monetary Policy Sources: Norges Bank and Datastream Nominal effective exchange rate. Norway 1990 = 100. Månedstall Apreciation --> Fixed exchange rate Stability against European currencies

ISv Reserve Bank of New Zealand 19 Feb 02 Monetary Policy A twin surplus per cent of GDP Current account balance Fiscal surplus

ISv Reserve Bank of New Zealand 19 Feb 02 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 FUND FOREIGN SECTOR PETROLEUM ACTIVITIES MAINLAND ECONOMY Financial investments abroad (USD 25,9 billion) Use of petroleum revenues (USD 0,6 billion) Demand for Norwegian goods and services (USD 3,9 billion) Government net cash flow (USD 24,7 billion) Export revenues oil and gas (USD 34,1 billion) Interest and dividends (USD 1,8 billion) Source: Ministry of Finance (RNB2001) Petroleum activities in 2001

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, , and st. deviation (per cent) of annual changes in terms of trade, Norway Sweden New Zealand Canada Australia UK Mainland Norway Sources: Eco Win and OECD

ISv Reserve Bank of New Zealand 19 Feb 02 Monetary Policy Sources: Norges Bank and Datastream Nominal effective exchange rate - stability in the medium term

ISv Reserve Bank of New Zealand 19 Feb 02 Monetary Policy Government Petroleum Fund Capital in per cent of GDP Source: Ministry of Finance

ISv Reserve Bank of New Zealand 19 Feb 02 Monetary Policy The Government's Long-Term Programme 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 Use of petrolum revenues Source: Ministry of Finance

ISv Reserve Bank of New Zealand 19 Feb 02 Monetary Policy Rise in labour costs, Key rates and rise in labour costs Per cent Euro area Sweden US Norway New Zealand Japan Denmark UK Australia Canada Interest rates

ISv Reserve Bank of New Zealand 19 Feb 02 Monetary Policy Public sector Manufacturing Source: Statistics Norway Signs of Dutch disease: Employment by sector Per cent of total employment

ISv Reserve Bank of New Zealand 19 Feb 02 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: