One of these factors is that economic agents look to the future when they make decisions about consumption and investments, wages and prices, and want to take account of economic policy not only as it is today, but also as they expect it to be tomorrow and in the future. This is particularly evident in foreign exchange and financial markets, where exchange and interest rates are influenced when participants shift large amounts partly on the basis of their expectations concerning economic policy and economic developments. Financial market expectations concerning economic policy are entirely different today from what they were 20-30 years ago. Behaviour can change from being very rational to herd behaviour. The issues that receive attention, and that govern movements in exchange and interest rates, change. It is thus important that the authorities do not sow doubt, but on the contrary act in a long-term and predictable manner. The authorities must be credible and inspire confidence. There must be a good match between the stated objectives of economic policy and what is actually done to achieve them. This is the most important reason why the implementation of monetary policy has been delegated to the central bank in Norway,  1  Cf. Official Norwegian Report (NOU) 1973:36 (price problems). BIS Review 50/2002  1  as has been the case in other comparable countries. In Norway, the responsibility for interest rate decisions was delegated to Norges Bank in 1986. The other factor is the special challenges to stabilisation policy posed by petroleum revenues.
Is there, for example, a risk of a situation arising where Norges Bank tightens monetary policy to achieve the inflation target, while at the same time the central government authorities increase the use of petroleum revenues (more than implied in the fiscal policy guideline) in order to increase employment and reduce unemployment? 2  4  Report 29 (2000-2001) to the Storting: Guidelines for economic policy. BIS Review 50/2002  There are various factors that can prevent the interplay between monetary and fiscal policy from 3 functioning. Interplay functions well when the decision-making bodies are conscious of how one body’s decisions influence the decisions of the other. Unless this fact is recognised, a decision will not produce the result that was planned. The economy may move in a very undesirable direction, with 4 high interest rates, sluggish economic growth and deterioration in the state’s financial position. However, even without continuous coordination, a fairly good result may be achieved if fiscal policy 5 acts as “leader” and monetary policy as “follower”, to use expressions taken from game theory. The authorities determine fiscal policy knowing how monetary policy will react. Today’s flexible inflation targeting establishes a firm framework for monetary policy and provides clear guidelines on how monetary policy is to respond in different situations. The fiscal policy authorities can internalise the monetary policy response pattern. This is only natural, since the mandate for monetary policy was laid down by the Government and the Storting.