Prepared by Cheng Hoon Lim.
After the devaluation in 1986, the Government made a firm commitment to maintaining a stable exchange rate.
The ERM bands were widened to 15 percent either way of the central rate.
The recent revision in the national accounts, however, indicate that cost competitiveness (for the manufacturing industry) improved by a smaller margin between 1988 and 1993 than previously estimated as a result of weaker productivity growth and higher wage growth. The rise in unit labor costs for the manufacturing industry is now estimated at 14 percent during this period against earlier estimates of 6 percent. Hence cost competitiveness improved by an annual average of 0.7 percent between 1988-93 as opposed to previous estimates of 2.7 percent.
These developments fueled fears of a renewed period of debt-financed consumption. However, in real terms, current growth rates are still relatively moderate compared to the 10-15 percent growth rates in the mid-1980s. Hence, the growth in domestic credit so far does not indicate a strong build-up of debt in the private sector.
The Finnish peg was abandoned on September 8, 1992 and the Swedish peg on November 19, 1992. Previously, the markka was temporarily floated on November 14, 1991 but was repegged the following day with a depreciation of 12.3 percent.
The stated objective of monetary policy in both Sweden and Finland is inflation targeting. The Riksbank has an inflation target of 2 percent, with a tolerance range of 1 percent. The Bank of Finland aims to keep underlying inflation to 2 percent, on average.
The krona and markka hit their post-float lows in April 1995 and February 1993, respectively.
Oil and gas production now contributes about 13 percent of GDP and are third of Norway’s exports.
The net financial asset position in Norway is also positive, in contrast to the other two countries.
It is worth noting that the complete recovery of the 1992 banking crisis has also contributed to increasing the credibility of Norway’s exchange rate and monetary policy.