Interest rates are changed more gradually with less impact on output than under a strict inflation target, and inflation is allowed to deviate from the target over a somewhat longer period. This is called flexible inflation targeting. (See for example Svensson (2000).) Flexible inflation targeting both provides the economy with a nominal anchor and contributes to smoothing fluctuations in output and employment. In the countries that normally figure in our comparisons, the responsibility for monetary policy has now been delegated to a central bank. The first and most widely known examples of independent central banks are the Bundesbank and the Federal Reserve. The delegation of monetary policy decisions to an independent central bank also finds support in economic theory. It contributes to securing credibility, confidence and consistency because an independent central bank must adhere to its mandate. This increases the scope for monetary policy to contribute to stability. For a discussion of central bank independence, see Hylland (2000). The benefits of autonomy are related to the way in which it induces economic agents to look ahead when making decisions. They take into account economic policy as they expect it will be tomorrow and the day after. It is thus important that the authorities do not sow doubt, but on the contrary act in a predictable manner within a long-term framework. The authorities must be credible and inspire confidence. There must be consistency between the stated objectives of economic policy and what is actually done to achieve them.
Svein Gjedrem: Monetary policy in Norway Lecture by Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Norwegian School of Economics and Business Administration, Bergen, 17 October 2002. The text below may differ slightly from the actual presentation. The references for the speech can be found on the Norges Bank’s website. *  *  *  A year and a half ago, the Government and the Storting adopted new guidelines for economic policy in Norway. The guidelines outline a medium-term strategy for the use of petroleum revenues over the government budget. Government petroleum revenues are transferred to the Government Petroleum Fund. The guidelines provide for the use of the expected real return on the Fund, i.e. 4 per cent of the Fund’s market value each year. As the Fund’s market value grows, so does its return. A gradual increase in the use of petroleum revenues ensures greater stability than a rapid withdrawal. The Government laid down a new operational mandate for monetary policy at the same time. Norges Bank shall set the key interest rate with a view to maintaining low and stable inflation. The inflation target is set at 2½ per cent. The responsibility for implementing monetary policy is delegated to Norges Bank pursuant to the Norges Bank Act and appurtenant regulation. Norges Bank sets the interest rate on the basis of our understanding of the regulation.