Jarle Bergo's second and last term as Deputy Governor of Norges Bank will be completed on 1 April 2008, close to 40 years after he assumed his first post at this august institution. As a fresh graduate of the University of Oslo--with excellent grades--he was assigned to the post of economist in the Monetary Policy Department in 1969. A year and a half at the Norwegian Institute of International Affairs, a few years at the International Monetary Fund (IMF) in Washington D.C. and a few years at the EFTA Secretariat in Geneva were the only periods Jarle Bergo spent away from his work at the Bank. In April, he returns to the IMF as deputy director of the Nordic-Baltic Office. Has he specialised as deputy? No. During his previous period at the IMF, he was executive director of the office. But the posts are rotated. Today, it is a Swede's turn to take the helm.
We met him at his spacious, airy and stylish office atop Norges Bank's impressive building in the city centre of Oslo, an edifice history will show that we were right to have built. His office is half-full of cartons. He is already busy packing. There is also an almost empty fruit basket and a few bottles of sparkling water. And instant coffee.
"It's a strange time to look back" the retiring Deputy Governor reminisces, "purely in monetary policy terms.
During his long career at Norges Bank, Jarle Bergo was also head of the editorial committee for Penger og Kreditt (Economic Bulletin) for close to ten years. As he is now stepping down as Deputy Governor after close to 40 years of service at the Bank, the editorial committee has asked Arne Jon Isachsen to interview him in a more personal style than the speeches regularly published in the Economic Bulletin. A bibliography of work by or about Jarle Bergo published in books, periodical, reports and newspapers is also provided. Arne Jon Isachsen is a professor at the Norwegian School of Management BI and head of the Centre for Monetary Economics at the school. As an active writer, he has followed Norwegian monetary policy throughout Bergo's career at Norges Bank. Isachsen was also an employee of Norges Bank for several years in the 1980s when the Bank was developing its research department. In some respects, we are now back to normal" he continues. "From the collapse of the Bretton Woods System in the period December 1971--March 1973 and up to the 1990s, virtually all countries 'forgot' that the overriding task of monetary policy is to provide economic agents with a secure and stable nominal anchor. Monetary policy can never have permanent real economic effects," Bergo reminds us.
In the first years after the Second World War up to the end of the 1960s, the exchange rate served as an anchor. "People my age," says Bergo, "remember that the value of the US dollar against the Norwegian krone was fixed for a long period at NOK 7.14. The empirical observation that lower unemployment could apparently be 'bought' through higher inflation--as shown by the Phillips curve--became too tempting for politicians. With steadily rising inflation in the anchor currency country the US, the fixed exchange rate system functioned ever less effectively. Other countries that had pegged their currency to the US dollar were forced to accept US inflation rates," he points out.
But why did the Phillips curve fail to function? Why did this curve not hold? Bergo explains, "Imagine Robinson Crusoe and Friday on their desert island. They fish, gather coconuts and firewood. In this simple economy, if Robinson as governor of the central bank conducted a monetary policy where he started printing more banknotes, would this in itself have resulted in more fish, coconuts or firewood? No. Robinson may for a short period have been able to fool Friday into selling his stock of goods and pay with new money. Prices would have risen. But Friday would have learned."
The larger picture: You can fool some of the people all of the time, and all of the people some of the time, but not all of the people all of the time, as Abraham Lincoln once said. This is exactly why the Phillips curve does not hold, and why demand management in the 1970s and 1980s had such limited success.
"When the battle against inflation was finally taken seriously, both unemployment and inflation were high. Many countries, including our own, were struggling with stagflation." Bergo reminds us.
"Why," I wonder, "did Norway choose its own little currency basket in 1978, while we had participated in the European snake in the preceding 5-6 years, a system that involved fairly fixed exchange rates between European currencies." "There were two reasons," says Bergo. "The need for pound sterling, the Swedish krone and the US dollar to influence the krone's external value by including them in the basket. In addition, there was probably a political element, which was that the more binding EMS arrangement was less suitable for Norway after voting against EEC membership in 1972."
In the ten years up to our last devaluation under Gro Harlem Brundtland's government in May 1986, Norway devalued its currency as many as ten times," affirms the Deputy Governor. "The background was higher inflation in Norway...