An important outcome is shown in this chart. The chart compares two different paths for consumption during a recession. The blue line shows the average path, while the yellow line shows the path following a period of high debt growth. The results confirm that high debt growth ahead of a recession leads to a deeper downturn. It also takes longer for the economy to recover. 3/5  BIS central bankers' speeches  Chart: Monetary policy and financial stability When financial imbalances are building up, the probability of a deep recession may increase. This is illustrated in this chart by the blue lines. The uncertainty bands around inflation and the output gap are highly assymetrical. Monetary policy can dampen vulnerabilities by keeping the interest rate somewhat higher than would otherwise have been the case – in other words, by “leaning against the wind”. This policy is illustrated by the red lines. By keeping the interest rate higher, the risk of a deep economic downturn is reduced. The uncertainty bands are more narrow and symmetric. But this policy also entails a short-term cost: capacity utilisation is lower, and inflation may stay below target. The aim of “leaning against the wind” is to achieve an improved path for inflation, output and employment over time. This is in line with our central bank mandate. Flexible inflation targeting with a sufficiently long horizon should take financial stability into account if the situation so allows and so warrants.
Øystein Olsen: The role of central banks – a Norwegian perspective Speech by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the Official Monetary and Financial Institutions Forum (OMFIF), London, 1 November 2016. * * * The charts can be found at the Central Bank of Norway’s website. INTRODUCTION Let me begin by thanking the OMFIF for the opportunity to speak to you today about the monetary policy regime in Norway. Like other central banks, the central bank of Norway is facing new challenges in a post-crisis environment of persistently low interest rates and uncertainty. Today I want to focus on how Norges Bank is responding to those challenges. Inflation targeting was formally introduced as a framework for monetary policy in Norway 15 years ago. As in other inflation-targeting countries, our inflation targeting regime has become more flexible over time. The operational target of monetary policy in Norway is annual consumer price inflation of close to 2.5% over time. However, according to the mandate, interest rate setting should seek to achieve a reasonable balance between inflation and capacity utilisation. Monetary policy should also be robust, taking uncertainty into account and seeking to avoid adverse outcomes. I will reurn to this topic in the following. The reasoning behind the policy rate decision taken by Norges Bank’s Executive Board is published in our Monetary Policy Report. The evolution of inflation targeting in Norway reflects the practical experience we have gained since it was introduced. The trade-offs have been challenging at times.