Monetary policy under low inflation

Norway has a robust macroeconomic policy framework to manage the potentially destabilising impact of its oil wealth. Nonetheless, emerging macroeconomic imbalances due to the unusually large terms of trade shock may require flexibility in adaption of policy rules. The current strong growth in the re...

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Bibliographic Details
Published in:OECD Economic Surveys 2007, Vol.2007 (2), p.49
Format: Report
Language:English
Subjects:
Commodities
Competition
Economic impact
Economic stabilization
Households
Housing
Housing prices
Inflation
Interest rates
Labor market
Macroeconomics
Monetary policy
Mortgages
Productivity
Terms of trade
Trends
Unemployment
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Summary:Norway has a robust macroeconomic policy framework to manage the potentially destabilising impact of its oil wealth. Nonetheless, emerging macroeconomic imbalances due to the unusually large terms of trade shock may require flexibility in adaption of policy rules. The current strong growth in the real economy and the positive output gap must be seen against the back-drop of sustained low core inflation, reflecting monetary policy trade-offs inherent in the flexible inflation targeting regime. Still, monetary policy is faced with a difficult trade-off, as bringing inflation quickly up towards the inflation target may conflict with stable developments in production and employment. While a structural boost to potential growth may explain the past period of strong growth and low core inflation, this is hard to ascertain. Policy should assume that the structure of the economy has not really changed, and withdraw monetary stimulus relatively quickly, aiming at anchoring inflation expectations on target and at the same time stabilising the real economy. [PUBLICATION ABSTRACT]
ISSN:0376-6438
1609-7513