An inflation target for monetary policy was introduced, with an operational target for annual consumer price inflation of close to 2.5 per cent over time. The fiscal policy rule was also introduced. According to this rule, the cyclically adjusted non-oil government budget deficit shall correspond to the long-term real return on the Government Pension Fund – Global. The division of responsibility in economic policy has since been the following: •  Monetary policy steers inflation in the medium and long term and can also contribute to smoothing swings in output and employment. •  The central government budget – growth in public spending – affects the real krone exchange rate and the size of the internationally exposed business sector in the long term. At the same time, developments in government expenditure and revenues must ensure a reasonable distribution across generations. •  Wage formation, the structure of the economy and incentives determine how well and how efficiently we utilise labour and other real economic resources. It is the government that defines the inflation target. Norges Bank sets the interest rate with the aim of reaching the inflation target. The Bank must account for its decisions. It does so through an annual report on the conduct of monetary policy. The report is submitted to the Ministry of Finance to be presented to the King and communicated to the Storting. The government’s assessment is presented in the annual credit reports.
High inflation and inflation that varies considerably over time result in random changes in the real value of assets and debt. This leads to unintended transfers between creditors and debtors. When inflation is high and variable over time, the function of prices as an information vehicle is also impaired. When inflation is low and stable, changes in relative prices are more easily discernible, and it is easier for households and businesses to make decisions about consumption and investment. Low and stable inflation is the best contribution monetary policy can make over time to employment, economic growth and welfare. The central banks in the first industrialised countries have attained a more independent status over the past 20 years. This is partly because Germany and its firm Bundesbank fared better during the period of high inflation in the 1970s and 1980s than many other countries. Arguments in favour of an independent central bank are also found in economic theory. Studies by Finn Kydland of Norway and Edward Prescott of the US at the end of the 1970s on economic policy rules were groundbreaking. 10 The insights gained from these studies provide arguments for ensuring central bank independence and deriving monetary policy objectives. History and theoretical studies have taught us that adverse effects may occur if the authorities do not take into account that households and enterprises are forward-looking when making decisions about consumption, investment, wages and prices. They base these decisions their expectations of economic policy in the future, not only on today’s policy.