Well, you all well know that Milton Friedman was rather sceptical about our ability to avoid serious mistakes in this very area and that led him towards the formulation of a “simple rule” of constant growth of the money stock. In this framework no forecasting was required. Of course, he faced evidence of the failure of the large-scale econometric models that had been used in the 1950s to 1970s and that were later subject to strong criticism. The models were hit by a series of structural breaks, which made the previously observed relationships unreliable. Consequently, it was argued that these breaks were not a result of bad luck only, but also reflected a lack of microeconomic foundations in the models, neglect of forward-looking expectations and ad hoc econometric restrictions. The terms “Lucas critique” and “Goodhart law” have become standard warning signs for all macroeconomic modellers. The actual way in which forecasts are produced and used at central banks has, however, changed substantially over the past two decades. The changes have reflected developments both in the economic (and econometric) theory and in monetary policy regimes. Bearing in mind the failure of large-scale models, the profession has started to prefer smaller-scale models with a sounder microeconomic background, built in recent decades usually along the lines of New Keynesian Economics. As the first generation of these new models matured, though, the second generation started to become more detailed again.
Chart 6. NOK bonds issued outside Norway Total outstanding. In billions of NOK 100  100  80  80  60  60  40  40  20  20 0  0 2000  2001  2002  2003  Source: Norges Bank  This is reflected in the international market for bonds issued in NOK. Last year, such bond issues amounted to more than NOK 50 billion. Both foreign and Norwegian companies were issuers and a number of small and large foreign investors and Norwegian companies - primarily life insurance companies - were buyers. The relationships in the foreign exchange market are unstable. New shifts in the world economy may reduce interest in the krone. Chart 7. Relative labour costs Deviation from historical average. Per cent 20  20  31 January 2003  15  15  10  10  5  5  0  0 -5  -5  Common currency  -10  -10 -15  -15 1970  1975  1980  1985  1990  1995  2000  Sources: TRCIS/IMF, Ministry of Finance and Norges Bank  As a result of the strong krone and a high wage level, competitiveness in business and industry is close to 15 per cent weaker than the average for the past 30 years. Historically, following such substantial deviations, competitiveness has always returned to the average fairly rapidly.