Journal of Political Economy 85: 473–492. 2  The advantage of tying oneself to economic policy objectives does not conflict with the ability of economic policy to stabilise the economy at the same time. On the contrary, a credible commitment to objectives can provide greater leeway for stabilising the economy. See, for example, Michael Woodford (2003) “Interest and Prices”, Princeton University Press. BIS central bankers’ speeches  3  The clearest expression of this lesson was found in monetary policy. In Norway, the authorities set an objective for the value of the krone, but devalued when the krone came under pressure. The devaluations were over time incorporated into expectations and inflation surged. It is tempting to quote Hermod Skånland, who stated that Norway “early and with great perspicacity” charted a course for economic policy – and thereafter promptly embarked on a different path. 3 During the upturn in the mid-1980s, the interest rate was held low and public spending was high. The economy became vulnerable. When oil prices fell in 1986, a change of course became imperative. All efforts were concentrated on bringing public spending under control. Interest rate setting was geared towards maintaining a steady krone exchange rate. The aim was to bring down inflation close to the level prevailing in other countries. The banking crisis and the downturn in the early 1990s led to renewed recognition that market forces had to be controlled and banks regulated. An approach based on broad economic policy cooperation was pursued.
The government and the Storting approved additional spending, bringing the overall contribution from fiscal policy to more than NOK 100 billion in these two years. Hardly any other country provided such strong overall stimulus through the use of public instruments during the crisis. The guidelines from 2001 provide a clear long-term framework for monetary policy and fiscal policy and provide for cyclical adjustments in economic policy – in part automatically and in part through judgement. In this way, the guidelines reconcile the need for a flexible approach to macroeconomic management with the gains brought by a commitment to more long-term operational objectives. A decade of inflation targeting Inflation is so low today that most people barely give it a thought. The rate of increase in consumer prices has disappeared from the front pages, where it was a frequent guest in the 1980s. We do not miss inflation. Even though inflation over the past decade has been close to the target of 2.5 per cent, demanding trade-offs have had to be made over the years. The element of judgment in the conduct of monetary policy has been put to the test. Through the years, we have gained insight into the functioning of the Norwegian economy under an inflation targeting regime. Let me touch upon some of those insights. BIS central bankers’ speeches  5  Chart 9: Krone exchange rate, inflation and Norges Bank key policy rate.