For example, the Riksbank in Sweden reports to the Swedish Parliament’s Finance Committee on the conduct of monetary policy at least twice a year. Canada has a similar arrangement. The Bank of England must write an open letter to the Minister of the Exchequer if inflation deviates from the target by more than one percentage point. In the letter, the bank must explain why the target has not been reached and what measures will be initiated. In Norway in the summer of 2003, the Ministry of Finance asked Norges Bank to provide a more detailed account of actual price developments in relation to the monetary policy target. At that time, inflation was more than one percentage point below the target. Many central banks are required to inform the Ministry of Finance concerning their use of monetary policy instruments. The formal frameworks vary. The central banks in Australia and Canada have regular consultations with the government authorities concerning monetary policy. In Sweden, the central bank informs the authorities in advance about important monetary policy decisions. This is also the practice in New Zealand. Norges Bank has provided information to the Ministry of Finance in special meetings ever since the Bank received instrument independence in 1986. The Ministry can then also express their view. This procedure does not reduce the Executive Board’s responsibility for their decisions. In some central banks, government representatives can participate in monetary policy committee meetings, as a rule without voting rights.
Academic research is progressing on this front and, hopefully, at some point in time, workable and operational models will be developed that allow for more realistic settings where the complex interactions between the real and financial sectors of the economy are acknowledged in full and where financial variables (notably money and credit) play an active role in the monetary transmission mechanism. When this has been achieved, it will be possible to turn the two pillars of our analysis into a larger, single pillar as Vice President  BIS Review 132/2007  5  Lucas Papademos 7 has put it. Or, if you prefer another metaphor, we could join the two pillars with an arch, thus forming a solid bridge to support our monetary policy decisions. But policy is an ongoing activity. Policy-makers cannot afford the luxury of waiting for research advances to happen. Empirical evidence supporting these advances is itself frequently uncertain and provisional, open to revisions. Constantly confronted with the burdens of judgment, we are very much like sailors in Neurath’s boat. And, in this respect, I believe that the Eurosystem’s monetary policy strategy has been particularly useful in helping us navigate through the deep waters of pervasive uncertainty and to make decisions in real time. In my view, the Eurosystem’s concept has clear strengths. It permits a diversified approach to the assessment of economic developments and the outlook for price stability. It encourages cross-checking between different forms of analysis. It is a pragmatic and robust approach intended to help avoid major policy errors.