But how can the degree to which monetary policy has succeeded in stabilising inflation and resource utilisation be measured? The mean squared gap for inflation is a natural measure of the stability of inflation around the inflation target. The mean squared gap for output is a natural measure of the stability of the output gap and thus of the stability of resource utilisation around a normal level. Looking at Figure 1, it could be claimed that the mean squared gaps in panels b and c do not tell us anything of significance, as it is obvious from panels d, e and f that the lower repo rate path leads to a better outcome. However, the situation is unusual in that the main scenario is not efficient – that is, that it is possible to find another repo rate path that better stabilises both inflation and resource utilisation. A more normal situation is one in which a balance must be struck between prioritising the stabilisation of either inflation or resource utilisation. Such a situation prevailed for Norges Bank in March 2005, for example. In Figure 4, I present the mean squared gaps calculated on the basis of the alternative policy rate paths and equivalent forecasts for inflation and resource utilisation presented in Norges Bank’s monetary policy report from March 2005. The policy rate path then chosen depends upon the weighting placed by the central bank upon stabilising the output gap, as opposed to stabilising inflation (this weight is usually denoted by  ).
Svein Gjedrem: Monetary policy and the outlook for the Norwegian economy Address by Mr Svein Gjedrem, Governor of the Norges Bank, at a meeting of Sparebanken Nord-Norge, Tromsø, 25 September 2001. Please note that the text below may differ slightly from the actual presentation Summary and charts. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 19 September. *  *  *  Norway’s economic policy is based on new guidelines for fiscal and monetary policy. The new guidelines were published by the Government on 29 March 2001 in connection with the presentation of the Government’s Long-Term Programme. The inflation target for monetary policy came into force immediately. The guidelines for fiscal policy were discussed in the Storting in June and were approved by a majority. Monetary policy is oriented towards low and stable inflation. The inflation target is set at 2½ per cent. In general, the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances shall not be taken into account. In the 1990s, monetary policy gradually moved further away from the fixed-exchange-rate regime which was practiced from 1986 to 1992. Low and stable inflation is the best contribution monetary policy can make to growth, prosperity and income distribution. In the long term, monetary policy has little effect on the real economy. Low and stable inflation can, however, provide fertile ground for stability and growth.