[3] Chart: Regulation on Monetary Policy So there are good reasons that low and stable inflation is a monetary policy objective. The operational target of monetary policy in Norway is consumer price inflation of close to 2 percent over time. We measure consumer prices using the consumer price index (CPI). The CPI seeks to measure the rise in prices facing households. The index is widely used and well known. Virtually all inflationtargeting countries have chosen to stabilise CPI inflation. The CPI is associated with considerable short-term volatility. In practice, we therefore use different underlying inflation indicators, for example the CPI adjusted for tax changes and excluding energy products (CPI-ATE). [4] Chart: Both domestic and imported inflation sources of inflation The extent to which monetary policy should respond to changes in individual prices does not depend on its ability to influence the source of the price change. The response depends on how long the disturbances are expected to last and the extent to which they fuel inflation via spillover effects on other prices and wages. The recent surge in inflation is to a large extent ascribable to factors beyond Norges Bank’s control. There is not much we can do to reduce energy and commodity prices, or to relieve bottlenecks in global markets. But by dampening the level of economic activity, we can help to counter spillover effects of increases in individual prices on other prices and wages. Furthermore, even though Norges Bank cannot influence global prices in foreign currency, we can influence the krone exchange rate.
And so measures are taken by emerging markets in financial sector development to enhance and eventually liberalise the international mobility of investors and borrowers, and their funds, and the international mobility of financial instruments and financial institutions; in other words, they embrace financial globalisation. As we all know, there are risks to monetary and financial stability associated with such mobility, and events in the past two decades have indicated clearly that these risks are considerable. Many have pointed out that financial openness has to be supported by prudent  2  BIS Review 106/2009  macroeconomic policies and so financial openness serves also to impose needed discipline on policy making in emerging markets. I fear, however, that this is true only to a certain degree, in that the discipline imposed by capital mobility on emerging markets seems to be a lot tougher than that imposed on developed markets. The small size of emerging markets relative to the pool of international capital may be one reason behind this. The greater volatility of international capital relative to domestic capital is perhaps another. Also of concern is the willingness of some emerging market jurisdictions, in a perhaps doubtful attempt to attract the household names in international finance to set up shop as part of their strategies to develop their financial systems, to promulgate rules that may be unsuitable for their domestic circumstances.