This illustrates the first question, which is how to solve time inconsistency in fiscal policy. It is easier to follow the prescriptions of Keynes in bad times than in good times. This asymmetry may lead to an increase in budget deficits and sovereign debt over time, also referred to as the fiscal bias. As a result, many countries (PIIGS, UK,) have to tighten policy in a period when the real economy would certainly benefit from further stimulus. The crisis caused fiscal balances to deteriorate by 8–10 percentage points. There is an immense difference between encountering a shock of this magnitude from a positive fiscal balance of 4 per cent and encountering it from a negative fiscal balance of 4 per cent. From a negative balance of 4 per cent, fiscal balances end up at a 12 per cent deficit! Then it is imperative to tighten policy. A similar time inconsistency problem, the inflation bias, has been a much debated issue in monetary policy. The solution has been central bank independence. So the question is, is there something to be learnt from monetary policy? Ragnar Frisch  The fiscal bias is not a new phenomenon. And a number of possible solutions have been tried. As far back as in the early 1930s, the Norwegian economist and Nobel Prize winner Ragnar Frisch had the following suggestion: “It might be an idea to establish a cyclical council to make such decisions, a council that could operate with an independent status similar to that of the Supreme Court.
In Norway, as in most other countries, this was particularly distinct for credit to enterprises. Both higher spreads and tighter credit standards can have potentially strong contractionary effects on the economy and needed to be counteracted. BIS Review 113/2010  1  Liquidity and capital support was necessary to restore credit flows  The contractionary forces from the financial sector were addressed by providing liquidity and capital to banks, through both regular and unconventional instruments in many countries. Government actions enabled banks to continue to provide credit to households and enterprises. The crisis demonstrated that the transmission mechanism is important for the effectiveness of monetary policy. It also demonstrated that the relationship between price stability and financial stability must be given due attention. In Norges Bank there is close integration between the two areas Norges Bank Monetary Policy and Norges Bank Financial Stability. Norges Bank Financial Stability participates at all meetings in the monetary policy process. This ensures that sufficient attention is given to developments in the financial system. It also provided the necessary insight to make wellinformed assessments of the transmission mechanism during the crisis. Considerable revision of the interest rate forecast during the crisis  The second lesson is that inflation targeting seems to have survived the test. In my view, increased transparency and the efforts made to improve the communication of monetary policy to the general public have been very valuable.