Jan F Qvigstad: Comments on Lars E O Svensson's lecture "Policy expectations and policy evaluations – the role of transparency and communication" Speech by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), at the conference "Ten Years of Riksbank Independence", Stockholm, 11 September 2009. *  *  *  Introduction It was a great pleasure to accept the invitation to discuss professor and fellow central bank deputy governor Lars Svensson’s lecture in connection with the tenth anniversary of Riksbank independence. In his lecture, Lars Svensson discussed communication, credibility and monetary policy evaluation. He looks at general issues for central banks seeking to influence key rate expectations, using the Riksbank as an example. 1 I will not venture to remark on the Riksbank’s assessments but will offer my comments on the same issues in the light of Norges Bank’s experience of interest rate forecasts. There are a number of similarities between the communication strategies of the Riksbank and Norges Bank. And underlying these strategies is a model developed by, among others, Lars Svensson. In his lecture today, he described how to arrive at an interest rate path that “looks good”. He showed, as he has on many previous occasions, that this can be formalised by finding the interest rate path that minimises a given loss function. When does the interest rate “look good”? Svensson raises the issue of whether monetary policy is well balanced, not only ex-post but also ex-ante.
To describe monetary policy in terms of a constant rule derived from a known model of the economy is to ignore this process of learning. So how should central banks behave in the light of their ignorance? Two approaches have been suggested. Interestingly, at one end of the spectrum, both Milton Friedman and Robert Lucas argued that policy should be based on a simple rule precisely because of our ignorance. Central banks, in their view, should have limited ambitions and aim simply at steady growth of the money supply – the so-called k% rule under which the money stock rises at a fixed rate, k%, each year. As Friedman (1968) put it, “Steady monetary growth would provide a monetary climate favourable to the operation of those basic forces …… that are the true springs of economic growth. That is the most that we can ask of monetary policy at our present state of knowledge”.9 The principle of adopting a strategy that takes into account limits to our knowledge is a sound one. But advocates of a rigid k% rule argue that we should ignore all other sources of information (estimates of the output gap, for example) and allow any shocks to the velocity of money to feed through to activity or the price level. In practice, experience in both Europe and the US has shown that velocity shocks can be large and few economists now advocate the use of k% rules. So committing to a wholly inflexible rule is likely to be neither desirable nor credible.