Norges Bank interprets a “significant” change in the exchange rate as a change that fuels expectations of price and cost inflation to the extent that the change in the exchange rate becomes self-reinforcing. 7  BIS Review 14/2000  Monetary policy can counter such a self-reinforcing movement in the exchange rate by contributing to low and stable inflation without recession. In its conduct of monetary policy, Norges Bank therefore places emphasis on fulfilling the fundamental preconditions for exchange rate stability against the euro: monetary policy instruments must be oriented towards bringing inflation down to the level aimed at by the Eurosystem. At the same time, Norges Bank must prevent monetary policy from contributing to a deflationary recession as this may weaken confidence in the krone. The experience of the 1970s and 1980s shows that monetary policy cannot in the long run steer competitiveness or the size of the exposed sector. If we attempt to do so, monetary policy only contributes to instability. Such real economic fundamentals may on the other hand be influenced through fiscal policy and cooperation between the social partners. Norges Bank cannot with open eyes contribute to higher inflation or a deflationary recession. This would contribute to an unstable krone. Hence, there is no conflict between gearing monetary policy instruments towards low and stable inflation and the objective of a stable krone exchange rate over time.
At a premium, businesses can hedge against short-term fluctuations in the krone exchange rate. The fluctuations are not greater than in other countries with a floating exchange rate. In 1996 and in the autumn of 1998, Norges Bank attempted to attenuate movements in the krone exchange rate through exchange market interventions. On both occasions, interventions prompted a game situation between the central bank and market participants, as was also the case during the currency crisis in the autumn of 1992. When a central bank trades its own currency, market operators make a play for profits on the premise that the exchange rate does not reflect market fundamentals. In a world where capital flows freely, this game situation can quickly trigger large capital movements. The experience of the 1990s shows that Norges Bank does not have the instruments to fine-tune the krone exchange rate. Today’s monetary policy The objective of monetary policy is exchange rate stability against European currencies, defined as the euro from 1 January. Norges Bank’s mandate - which is the Exchange Rate Regulation - takes into account that the krone may remain outside its normal range. The Exchange Rate Regulation states that “in the event of significant changes in the exchange rate, monetary policy instruments will be oriented with a view to returning the exchange rate over time to its initial range”. The concept “significant changes” is not quantified and must be given an economic content.