Svein Gjedrem: Monetary policy’s role and contribution  Address by Svein Gjedrem, Governor of Norges Bank, at the Norwegian Savings Banks Association’s Conference Society and Economics 2000 held in Oslo on 13 October 2000. *  *  *  The long-term task of monetary policy is to provide the economy with a nominal anchor. Economic agents must be relatively certain of the future value of money. Agreements relating to purchases and sales, loans and interest rates are concluded in nominal terms. The decentralisation of decisions both in the public and business sector is based on nominal budget limits. The tax system is in nominal rates. When prices fluctuate widely, it is impossible to foresee the content of such agreements and budgets in real terms. Unexpected price variations could thus easily result in undesired fluctuations in the real economy.1 A credible and consistent monetary policy provides enterprises, households and institutions with the confidence that the value of the krone will be stable over time. This confidence is the best contribution monetary policy can make to employment, economic growth and welfare. This also prevents monetary policy from having arbitrary distributional effects. We thereby avoid high and varying inflation and boom periods that are followed by recessions. Norges Bank’s main monetary policy instrument is the interest rate. This instrument must be oriented towards the long-term objective of nominal stability in the economy. 1  See Rødseth (1987).
If fiscal policy lacks a long-term anchor, the interplay in economic policy will not function and the result will be a more unstable krone exchange rate and wider cyclical fluctuations. This will also result in poorer use of our resources, partly because strong fluctuations in domestic activity and long-term interest rates and the exchange rate will prompt investment decisions that are made on a very uncertain basis. BIS Review 92/2000  10  Concluding remarks Allow me to conclude where I began. I would like to highlight two points. First, the main function of monetary policy is to contribute to nominal stability. This is the best contribution monetary policy can make to a sound distribution policy, to employment, to economic growth and to welfare. Second, history has shown that monetary policy can be effective. If we set interest rates at a level that is too low, we may trigger strong forces in the credit market, as witnessed in other countries and as we experienced in Norway in the mid-1980s. If we allow imbalances to develop in the domestic economy, this could also lead to sizeable capital movements, accompanied by wide fluctuations in the exchange rate and long-term rates. These are strong latent forces that are far too easily forgotten. References Akram, Q F (2000): “PPP despite real shocks: An empirical analysis of the Norwegian real exchange rate”. Working Paper 2000/7, Norges Bank, Oslo. Bernhardsen, Tom and Øistein Roisland (2000): “Which factors influence the krone exchange rate?”, Economic Bulletin 2000/4 (to be published).