In Norway, this resulted in a period of low nominal interest rates set by the government authorities, direct regulation of credit through quotas set out in a separate credit budget, channelling of loans for special purposes via state banks, regulation of cross-border capital movements, a fixed but adjustable krone and occasionally the use of price and wage regulation. For a period, regulation and fine-tuning seemed to be having the intended effect. But in the 1970s, inflation got out of control in Norway and in a number of other countries. The Norwegian economy experienced a price/wage spiral. Although the krone was devalued several times in the 10-year period from 1976 to 1986 in pace with high price and wage inflation, this was nonetheless not sufficient to prevent a decline in the manufacturing sector. In 1980, Odd Aukrust, Head of Research in Statistics Norway, stated the following with regard to developments in the Norwegian economy: "Unfortunately there is even less reason for optimism this time. It seems that competitiveness in Norwegian manufacturing will deteriorate in the year ahead. The main problem is that no one can control price  4  See Ecklund (2008), p.120. BIS Review 111/2008  3  developments. With annual inflation at approximately 10 per cent, no one dares to invest in measures that could stop this price carousel.” 5 High inflation showed that the economic policy framework was not functioning as intended, and the importance of providing the economy with a nominal anchor became evident.
This was demonstrated by the Phillips curve (named after the economist A.W. Phillips), which showed that low unemployment has historically accompanied high wage growth. In the 1960s, Milton Friedman and Edmund Phelps rejected the idea that this empirical relationship could be used to reduce unemployment in the long term. Any attempt to reduce unemployment would over time only result in higher inflation, without affecting employment and output. A more detailed discussion of these developments in macroeconomic history can be found in Snowdon and Vane (2005). 7  See Schreiner (1982). 4  BIS Review 111/2008  that has now been established should, in addition to directly contributing to stabilising the krone exchange rate, also curb price expectations.” 8 In recognition of this fact, Norges Bank gradually gave greater weight to influencing inflation developments as a prerequisite for a more stable krone exchange rate over time. As stated in an article in the Norwegian daily newspaper Aftenposten in May 1999 9 : “In the discretionary assessments on which monetary policy is based, Norges Bank gives weight to fundamental preconditions for exchange-rate stability over time. Price and cost inflation must be brought down towards the level aimed for by the euro area countries. At the same time the situation must be avoided whereby monetary policy in itself contributes to a downturn with deflation.” The division of responsibility in economic policy was even more clearly defined when the government presented new economic policy guidelines in March 2001.