As there are so many ways of measuring resource utilisation one might think that it would be appropriate to take a broad approach and make an “overall assessment” based on a large number of indicators when making decisions about monetary policy. It is, however, generally accepted that an inflation targeting policy in which target attainment is measured using a large number of different measures of inflation does not work very well. It is often possible to find a measure of inflation that is reasonably close to the target and almost any monetary policy can be justified with the help of a clever choice of index. Therefore, if the target and target attainment are to mean anything, one measure of inflation must primarily be used. 2  BIS central bankers’ speeches  Similarly, I also believe that it does not work well to use a large number of different measures of resource utilisation. It is also often possible to find at least one measure that comes fairly close to normal resource utilisation and almost any monetary policy can be justified with the help of a clever choice of the measure of resource utilisation. This problem is in fact worse for resource utilisation than for inflation. This is because measures of resource utilisation also require us to make an assessment of the normal level for the measure concerned. For the output gap and the hours gap it is a case of determining the level and forecast for potential GDP and potential hours worked.
The repo-rate path chosen by the majority does not meet the well-known necessary but not sufficient condition for a well-balanced monetary policy formulated by the Deputy Governor of the Norwegian central bank Jan Qvigstad (2005). Applied to inflation and unemployment, this condition means that the inflation gap (the difference between inflation and the inflation target) and the unemployment gap should have the same sign. As the inflation gap is negative and the unemployment gap is positive for the majority’s repo-rate path for most of the forecast interval, this condition is not met. With a lower repo-rate path, on the other hand, the gap for both would be reduced and target attainment for both inflation and unemployment would thus increase. The fact that monetary policy is not well-balanced for the majority’s repo-rate path is clearly demonstrated if one uses mean square gaps to measure target attainment as in Figures 7 and 8. Figure 7 shows the forecasts for the CPIF and unemployment that are compatible with the main scenario’s repo-rate path and the higher and lower repo-rate paths published in Chapter 2 of the Monetary Policy Report in February. Panel b shows that the repo-rate path of the main scenario does not meet the Qvigstad condition. Neither is it effective, as a lower repo-rate path stabilises both inflation and unemployment better. Figure 8 shows the main scenario’s repo-rate path and the lower path that Karolina Ekholm and I advocated at the meeting.