7  Gunhild Ecklund (2008): “Creating a new role for an old central bank: The Bank of Norway 1945–1954.” Series of Dissertations 2/2008, BI Norwegian School of Management. 8  There was one parliamentary representative on the board as late as 1983. 9  Ivo de Figueiredo (2007): Henrik Ibsen. Masken [Henrik Ibsen. The Mask], Aschehoug. 10  See Harald Haare (2007): “Clearing and settlement at Norges Bank – a historical review”, Economic Bulletin 4/2007. BIS Review 154/2010  3  Norges Bank’s obligation to convert banknotes into gold was suspended, and the central bank provided funding for increased government activities and other purposes. 11 The gold standard ideal of an independent central bank was abandoned during the war. There was strong credit growth. The discount rate was kept low and there was a surge in government spending, while prices for our exports soared and foreign inflows of gold were substantial. The combination resulted in a boom period followed by a stock market crash, a banking crisis and a fall in monetary value. Francis Sejersted wrote the following about the appointment of Nicolai Rygg as governor of Norges Bank in 1920: “When [Prime Minister] Gunnar Knudsen [in 1920] called Rygg to the position of chairman of Norges Bank’s board, his aim was to secure the services of a strong and knowledgeable man. Gunnar Knudsen suspected an economic storm was brewing, and he suspected something that to a great extent was his own responsibility, namely that monetary policy had been neglected during the war.
The monetary policy framework must be based on sound theory concerning how monetary policy instruments affect the economy – theory that is well supported by experience and research. Otherwise, there is the risk either that goals will be set which monetary policy has little or no chance of achieving or that appropriate policy instruments will not be used. But the problem is that monetary policy transmission changes with developments in the economy and the financial markets and the effectiveness of different policy instruments can change over time. For example, where financial markets are underdeveloped and repressed, the tendency is to use policy instruments based on various kinds of quantitative restrictions such as lending ceilings and to actively use reserve requirements instead of price instruments such as interest rates, which are usually the most effective tool when financial markets are less restricted and more developed. In order to lay the groundwork for further discussion of the monetary policy framework, I will give you a broad sketch of the key points concerning monetary policy efficacy that must be considered when the framework is developed. In order to save time, I will paint with a broad brush and emphasise the points that are most important and are well supported by theory and research – including research on Iceland. In addition, these are key points that remain valid in spite of the experience of the financial crisis. In this context, two aspects are most important.