At the very first gathering of economists to create the American Economic Association, in Saratoga in September 1885, Richard Ely showed that he had the makings of a good central banker when he said, “We acknowledge our ignorance, and if we claim superiority to others it is largely on the very humble ground that we know better what we do not know”. Or, in Hayek’s words, “It is high time we took our ignorance more seriously”. The inability to bind future generations means that institutions do not resemble an optimal timeinvariant design chosen from behind the “veil of ignorance”. They reflect, in Hayek’s words, “how nations in the darkness stumble upon institutions which are in fact the result of human actions, not the implementation of a human plan”.20 Suitably designed, though, monetary institutions can help to reduce the inefficiencies resulting from the time-consistency problem and can incorporate new ideas into a discretionary monetary strategy constrained by a mandate that has widespread support in the population as a whole. A central bank needs to explain to the population both what it knows and what it does not know. Such a framework of “constrained discretion” for central banks is far-removed from the world of 1930 when the Deputy Governor of the Bank of England explained to the Macmillan Committee that “it is a dangerous thing to start to give reasons”. In 1908 Congress set up the National Monetary Commission to report on “what changes are necessary or desirable in the monetary system of United States”.
The trend in prices for consumer goods over the past two or three years is a result of a favourable supply shock to the Norwegian and global economies. Low inflation is being accompanied by real income growth and a rise in production. Since last summer, monetary policy in Norway has been oriented towards a gradual increase in the interest rate – in small, not too frequent steps – towards a more normal level. On the basis of current information, this interest rate path provides a reasonable balance between the objectives to be given weight by Norges Bank in its conduct of monetary policy: •  On the one hand, the objective of bringing inflation up to the target and anchoring inflation expectations suggests in isolation that interest rates should be kept at a low level until there are clear signs of higher inflation. •  On the other hand, the Norwegian economy is growing at a solid pace. Capacity utilisation is slightly above the normal level and increasing, and house prices and household debt are rising sharply. In isolation this would call for a tightening of monetary policy. Norges Bank has decided to use some time to bring inflation back to target and has chosen to gradually shift to a less expansionary stance. The assessments of economic developments ahead will determine how gradual the interest rate increase will be. Our current assessment implies an interest rate path where the interest rate is raised by about 1 percentage point this year.