•  The risks to financial stability are nowhere near pre-Crisis levels, but they bear close watching. We must not repeat the mistakes of the past. 11 But there is as yet no consensus on how to secure financial stability and, in particular, what role, if any should be played by monetary policy. 12  There are three broad approaches to these questions. •  The first is to stick to the status quo. Monetary policy remains focused on price stability and no recourse is made to macroprudential policy beyond the use of capital buffers to pre-empt insolvencies. •  In the second approach, monetary policy explicitly takes account of financial stability in addition to price stability. •  Under the third approach, monetary policy remains focused on price stability, while financial stability is secured with the help of macroprudential policy. 13 I will keep my remarks on the first approach brief as it is well-known and is still the dominant practice in most central banks today, especially in the advanced economies. Under this inflation targeting approach, monetary policy will not try to respond to credit cycles or asset bubbles unless they have a demonstrable impact on inflation outcomes. •  As Lars Svensson puts it, flexible inflation targeting “remains the best-practice monetary policy before, during, and after the financial crisis”. •  John Taylor, who will address us this evening, provides a more rule-based characterisation of this approach through the Taylor rule.
Norges Bank’s mandate provides a basis for the conduct of monetary policy: “Monetary policy shall be aimed at stability in the Norwegian krone’s national and international value, contributing to stable expectations concerning exchange rate developments. At the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment. Norges Bank is responsible for the implementation of monetary policy. Norges Bank’s implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. The operational target of monetary policy shall be annual consumer price inflation of approximately 2.5 per cent over time. [...]” The responsibility for implementing monetary policy is delegated to Norges Bank pursuant to the Norges Bank Act and the appurtenant Regulation. The Bank sets interest rates based on our interpretation of the Regulation. In our interpretation, we give weight to the Government’s rationale for the Regulation, to the purpose as expressed in the first section, and to our knowledge about the relationships between the interest rate, the exchange rate, output, employment and inflation. The first sentence in the mandate refers to the value of the krone. Stability in the krone’s internal value implies that inflation must be low and stable. Low and stable inflation contributes to economic growth and to stability in financial and property markets. The Regulation also states that monetary policy shall be aimed at stability in the Norwegian krone’s external value, contributing to stable expectations concerning exchange rate developments.