Norwegian monetary policy In the long term, a country’s exchange rate tends to move in line with developments in domestic price and cost inflation compared with other countries. If the level of prices in one country rises at a faster pace, that country’s currency will tend to depreciate to the same extent over time. Empirical evidence for these effects has been found for a number of countries, although the effects are relatively weak in  5  BIS Review 105/2000  the short term. However, substantial medium-term convergence in purchasing power parity has also been found between Norway and its trading partners.3 This means that higher inflation in Norway than in our trading partners has been followed by depreciation of the nominal exchange rate. This is reflected in the fact that the real krone exchange rate has been relatively stable over time. Movements in the krone exchange rate against the German mark over the past 30 years may serve to illustrate this. In the 1970s and 1980s interest rates were kept low, and they were politically determined. Price and cost inflation was generally higher than that of Norway’s trading partners. Frequent devaluations were used to redress the negative effects of high price and wage inflation on 3  See Akram (2000). BIS Review 105/2000  6  competitiveness. The average rate of increase in prices between 1973 and 1987 was almost 10% twice as high as the level in Germany.
In recent years we have attached importance to contributing to a transparent monetary policy. This is in keeping with trends in many other countries. Transparency promotes predictability in the behaviour of the central bank and helps diminish uncertainty for all participants in the economy. It is our hope that in this way the Norwegian economy will be less exposed to doubt and speculation concerning the setting of interest rates, with attendant greater stability in the formation of expectations and smoother movements in long-term interest rates. We aim to create a pattern of continuity and consistency in the implementation of monetary policy. Developments in financial indicators do not indicate that there is great uncertainty in the markets regarding developments in the internal and external value of the Norwegian krone. For instance, developments in bond yields show that the risk premium has been relatively stable in recent years. The pricing of the Norwegian krone in the options market indicates that substantial uncertainty with regard to movements in the value of the krone against the euro is not factored into the price of options. Norges Bank’s Executive Board engages in a broad discussion of monetary policy every six weeks. Any decisions concerning interest rate changes or other important changes in the use of monetary policy instruments are normally taken at these meetings. Monetary policy decisions made by the Executive Board (be they decisions to change key rates or to leave them unchanged) are announced in press releases at 2 pm on the day of the meeting.