Indeed, an inflation-targeting central bank ought to be willing to undershoot its target in the medium term, if it could thereby sufficiently improve the chances of meeting its target further out through the avoidance of a disruptive bust (Bean, 2003). Essentially, this involves the policymaker adopting a somewhat longer perspective than is sometimes the case in inflation-targeting regimes. On the other hand, other policymakers – most notably at the Federal Reserve – advocated a policy of benign neglect during the boom phase, coupled with aggressive relaxation (“cleaning”) should asset prices go into reverse (see e.g. Greenspan, 2002). Some analytical support for this approach was provided by Bernanke and Gertler (1999). The justification for this strategy rested on the following arguments. First, the policymaker needs to judge whether the credit/asset-price boom is warranted by fundamentals or whether it is instead based on misplaced expectations and furthermore poses a threat to future financial and macroeconomic stability; a mechanical response that 16  BIS Review 111/2010  treats all asset-price movements alike, whatever their cause, will be inappropriate. That is rarely straightforward given that credit/asset-price booms are apt to occur in the wake of genuine improvements in fundamentals – though central bankers are, of course, called upon to make difficult judgments all the time, for instance over the margin of spare capacity. Second, once a bubble is large enough to be identified, the presence of lags in the monetary transmission mechanism complicate the calibration of an appropriate policy.
37 The Act was drafted in the light of Norges Bank’s role in the postwar government administration. Therefore, the new Executive Board, which replaced the board of directors under the 1892 Act, is now appointed by the Council of State. 35  Elster, Jon (1979): Ulysses and the Sirens. Studies in Rationality and Irrationality, University Press, Cambridge. 36  Stanley Fischer introduced the difference between goal and instrument independence. See Fischer (1995): “Modern approaches to central banking”, NBER Working Paper No. 5064. 37  The Norges Bank Act is discussed in Helge Syrstad (2003):” Sentralbankens uavhengighet” [Central bank independence], Fagbokforlaget. 10  BIS Review 154/2010  Under the Act, Norges Bank is an executive and advisory body for monetary, credit and foreign exchange policy and shall monitor developments in the money, credit and foreign exchange markets. The Act makes no reference to the objective of monetary policy. On the contrary, its formulations are completely open-ended. 38 The Bank shall conduct its operations in accordance with the economic policy guidelines drawn up by the government authorities. How this was to be interpreted was the subject of controversy in the first years. Today, in the light of both the text of the Act and of the preparatory works, the implications of this may also be unclear. This provision has not gained any further practical significance. Today, Norges Bank no longer looks for guidelines in public documents.