It therefore was natural to communicate policy in terms of factors that are relatively easy to measure and comprehend, and to do so according to concrete, relatively simple principles that could serve as a guide for monetary policy and that could contribute to stabilising inflation expectations. Moreover, from the point of view of explaining policy it is good if the overall objective of price stability that has been adopted by elected bodies in many countries can also be used in the implementation of policy and be allowed to play a prominent part in the debate. That the communication still tends to focus so strongly on inflation, despite the considerable confidence in low-inflation policies today, could reflect a perception that it is not all that easy to make substantial changes to the policy rhetoric. Personally, however, I think the problem runs deeper than that. It is quite simply difficult to clearly communicate the kind of varying, subtle deliberations that are involved. Of all inflation-targeting central banks, Norges Bank is perhaps the one that has come furthest in terms of the ambition to clarify the way policy takes the real economy into account, regularly publishing estimates of the output gap parallel with inflation forecasts as well as discussions of how policy takes account of it. It seems an interesting path to take, but at the same time it is evident - on the basis of my ten years’ experience - that far from all the considerations we have faced would be captured by this model.
One of the examples of this is the fact that we did not utilise the scope for rate cuts that - according to a stricter interpretation - deregulation and other supply factors had created during the last few years of the 1990s. The clearest example of how we attempted to convey that our inflation targeting policy was flexible rather than strict was the clarification of monetary policy that the Executive Board published in 1999. In that, we explained that it may be appropriate in some situations - e.g. in the event of large shocks and deviations from target - to refrain from bringing inflation back to target too quickly in order to mitigate the adverse consequences for output and employment.1 We expressed this in terms of there being reasons to occasionally depart from our simple policy rule - that the repo rate is normally raised if inflation one to two years ahead is forecast to be above 2 per cent, and vice versa if inflation is forecast to undershoot the target. Explicit framework as basis The strategy that we in Sweden have chosen for dealing with the “flexibility problem” could, in simplified terms, be described as that we, when we have found it necessary, have in various ways modified and adapted a framework - mainly represented by an explicit symmetric target, regular publication of detailed decision-support data including forecasts, and a simple policy rule for how the repo rate is normally adjusted against the background of the forecasts.