Svein Gjedrem: Uncertainty, economic models and monetary policy Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Centre for Monetary Economics/Norwegian School of Management, Oslo, 17 September 2007. Please note that the text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 15 August, Monetary Policy Report 2/07 and on previous speeches. *  *  *  I welcome the opportunity this time to discuss with you at the Centre for Monetary Economics certain themes that are not related to the most newsworthy economic policy issues. I will discuss the following three themes: •  the role of monetary policy  •  our view of economic models as a basis for interest rate setting  •  and finally, measuring inflation and uncertainty linked to the rate of inflation at a given point in time  Let me start by discussing the role of monetary policy. The primary objective of monetary policy is to ensure that inflation expectations are low and stable. Expectations of low and stable inflation provide a nominal anchor. Economic agents’ inflation expectations influence the decisions they make today. Our experience – and the experience of other countries – shows that without a nominal anchor we cannot achieve stability in employment and output.
The exit from exceptional monetary measures should be fully in the hands of the central bank and guided by its mandate of price stability. Fiscal authorities must also be credible and give guidance on their future actions, by committing to tightening the stance when the economy has recovered. They should follow a stronger countercyclical fiscal policy in good times, to create the space that is necessary in bad times. What Blanchard and Summers5 call “semiautomatic stabilizers” – stabilising fiscal policies that operate according to predefined triggers – could be an avenue worth exploring. Let me add as a conclusion that, against this backdrop, the Next Generation EU package constitutes a new and innovative element of the European fiscal framework, which contributes to a sounder policy-mix. Beyond the most recent political and institutional discussions, which belong to elected leaders, a quick implementation of this European Recovery Fund is an economic must. This innovation, while still a one-off, could also imply lessons for the Economic and Monetary Union, which from the start has lacked a permanent fiscal capacity at supranational level for macroeconomic stabilisation in deep crises. Either we succeed in designing – at end – credible and coordinated countercyclical rules for national fiscal policies, or we should think about some 4/5  BIS central bankers' speeches  central fiscal capacity, reversible in its use, controllable in its size, but effective through the cycle. This should be one area of discussion in the “European momentum” which the crisis has initiated. Thank you for your attention.