Lucky for us

20 October 2014 16:57

(updated: 21 March 2016 16:58)

Lucky for us

Norway has experienced robust growth, low unemployment and stable inflation. NHH Professor Øystein Thøgersen argues that the current situation is mostly down to luck.

The setbacks in the Norwegian economy during the financial crises have been mere ripples compared to what we have seen in the rest of Europe.

"We have been very lucky. We have found a lot of oil. When we have believed oil revenues to be on their way down, we have found more", says Professor Øystein Thøgersen.

Along with Erling Steigum at the Norwegian Business School, he has written an article about how the bank crisis in the 1980s and 1990s affected Norwegian monetary and financial policies. In the article, they argue that the current positive situation is down to luck, but also a dose of political skill.

Trial and error

Skill, understood as reforms and political changes at the right time, have not always been evident, says Thøgersen.

"Rather, it is a result of trial and error. In the 1970s and 80s, developments in the Norwegian economy were very unstable, and inflation was high and volatile. The monetary policy regime was not working.

In the eighties, we had a crisis that was worse than any other in the post-war period. It showed that we did not manage the uncertain oil revenues properly."

Declining oil prices

The crisis, which started with the decline in the price of oil in 1986 and a poorly handled deregulation of the credit market, ended with the large banks going bankrupt and having to be rescued by the state in the early 1990s. All the Nordic countries, except Denmark, experienced banking crises.

"But politicians and the banks themselves learnt from the crisis, and that turned out to be useful during the last crisis. Norway, Sweden and Finland did not need to rescue banks in 2008. Presumptively, this may be due to the lessons learnt", says the Professor in the Department of Economics.

On the other hand, Denmark had a sort of bank crisis this time, says Thøgersen.

Surprises were good practice

In the article, the professors describe a gradual evolution of monetary policy. For those who may believe that the unbearably predictable interest rate meetings of recent years is a natural aspect of monetary policy, the paragraphs about the "old" approach may come as a shock.

"In the 1980s, surprises were viewed as best practice in monetary policy", says Thøgersen.

"We cheered Governor of Norges Bank Hermod Skånland, who tried to surprise the entire country. You could wake up in the morning and hear on the radio that 'Norges Bank has decided to increase the interest rate by four percentage points in support of the exchange rate'. No one knew there was an interest rate meeting, even", says Thøgersen.

Overly optimistic

Today, an unexpected change is generally the worst idea a central bank can have. The surprises are limited to slightly unusual choices of words in the footnotes.

- This is just 30 years ago, and yet it is an entirely different world?

"Definitely. The surprise-based regime also applied to fiscal policies, which at the time were to finetune fluctuations through taxation levels and public spending. There was great faith in the ability to finetune the economy. When we look at the cyclical fluctuations in the 80s, it is easy to see that this was overly optimistic", says Thøgersen.

Queuing for loans

One monetary policy reform followed the other until the turn of the millennium, when the inflation target and the fluctuating exchange rate were established facts. Previously, Norway was one of the countries that kept the politically determined low interest rate the longest, and politicians also determined how large the credit volume was to be. The way you got a loan, was to queue up.

In the end, the credit rationing broke down in the mid-1980s. However, the timing of the liberalisation was not quite successful.

"First, we let loose the credit volume, so that banks in an optimistic period could throw money at people. However, this happened before the central bank was permitted to set an interest rate appropriate to the economic conditions."


Norway maintained the politically determined low interest rate regime for a while. Furthermore, we had favourable rules for tax deductions for the interest rate, so that the real interest rate after tax was negative.

"The consequence was an enormous surge in the amount of loans", says Thøgersen.

The politically determined low interest rate was abolished in 1986. From more or less having been a subsidiary to the Ministry of Finance, the central bank was given the operative independence to set the interest rate.

Spent too much

Today, Norges Bank has another important task to manage: to manage the money in the Oil Fund. In the 1980s, there was no such fund.

"We got used to spending too much of the oil money on an ongoing basis. In the 1970s and early 1980s, we did not quite understand that the oil prices could fall. The general forecast was that the oil would be finished in 2000", says Thøgersen.

The belief in scarcity of the oil meant that we thought oil prices would have to increase anyway. The only question was how much they would increase.

"The Oil Fund arrived too late"

Then the dramatic fall in the oil price came in 1986, which pulled Norway into a full-blown crisis. When Norway finally got the Oil Fund in place in the early 1990s, the government was in a debt position.

At the time, Skånland, the Governor of Norges Bank, said: "It's just too bad that the Oil Fund came too late to have any practical significance."

"But we were lucky again: We found lots more oil and the prices rose, which has meant that the Oil Fund actually came to be highly significant", says Thøgersen.

Read more about Øystein Thøgersen

This article was first published in NHH Bulletin nr. 3 2014.

Text: Olav Slettebø