Throughout the 1990s, the objective of monetary policy was to stabilise the krone and thereby make a contribution to low inflation. The central government budget was to smooth fluctuations in output and employment. This became increasingly demanding as favourable economic developments and oil revenues generated government surpluses. Both the interest rate and the government budget had then, in periods, the effect of amplifying, not dampening, cyclical developments. This resulted in fluctuations in the krone exchange rate. 31 Norges Bank was forced to recognise that it could not fine tune the exchange rate from day to day or month to month. Nor would the Bank knowingly contribute to fuelling inflation or deflationary downturns. Interest rate policy was then instead geared to keeping inflation in line with euro area countries. As from 1999, the Bank’s policy was in practice oriented towards an inflation rate of around 2 per cent. 32 Keeping inflation low and stable is the best contribution monetary policy can make to economic stability and a stable krone exchange rate. A formal inflation target – with a target of 2.5 per cent – was introduced in Norway in March 2001. The new monetary policy framework was introduced at the same time as the government drew up new fiscal policy guidelines that provided for a gradual, albeit sustainable, phasing in of oil revenues into the Norwegian economy.
Finanstilsynet (the Financial Supervisory Authority of Norway), for example, sets limits on the size of a single loan in relation to the collateral provided. Another possible measure is to set minimum requirements for the risk weights banks can use in their internal model-based approach to calculating capital adequacy. 46  As an extraordinary measure, in connection with the establishment of the swap facility, 2- and 3-year fixedrate loans specially designed for small banks were allotted. This was extensively explained in the Storting documents. 47  See also Peter Stella: “Minimizing Monetary Policy”. Paper presented at the Annual General Meeting of the Bank for International Settlements in June 2009. http://www.bis.org/events/conf100624/stellapaper.pdf  48  The mechanism in known in economic theory, see the Modigliani-Miller theorem. BIS Review 154/2010  15  In other countries the procedures are now being revised to allow central banks to participate when such discretionary measures are implemented. In Norway, Finanstilsynet is highly competent in the oversight of individual institutions. However, Norges Bank has more competence in macroeconomic matters, given its tasks. The central bank also has an informational advantage as we are the bankers’ bank and operate in foreign and domestic markets. The division of responsibility should be based on the advantages specific to each organisation. The Ministry of Finance should define the objective of macroprudential supervision and delegate its use. The Ministry must also assess whether the objective has been achieved. One alternative is to delegate responsibility for implementing discretionary measures against systemic risk to Norges Bank.