Monetary policy shall also underpin fiscal policy by contributing to stable developments in output and employment. • Norges Bank is responsible for the implementation of monetary policy. Fafo og Makt- og demokratiutredningen 6. september 2002  Norges Bank’s mandate reads as follows: Monetary policy shall be aimed at stability in the Norwegian krone’s national and international value, contributing to stable expectations concerning exchange rate developments. At the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment. 2  BIS Review 50/2002  Monetary Policy Regulation (2) • Norges Bank's implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. The operational target of monetary policy shall be annual consumer price inflation of approximately 2.5 per cent over time. Fafo og Makt- og demokratiutredningen 6. september 2002  Norges Bank’s implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. The operational target of monetary policy shall be annual consumer price inflation of approximately 2.5 per cent over time. The first paragraph of the mandate sets forth an objective. The last paragraph specifies what Norges Bank shall do. The first sentence in the mandate refers to the value of the krone. Stability in the national value of the krone implies that inflation must be low and stable. Low and stable inflation fosters economic growth and stability in financial and property markets.
Is there, for example, a risk of a situation arising where Norges Bank tightens monetary policy to achieve the inflation target, while at the same time the central government authorities increase the use of petroleum revenues (more than implied in the fiscal policy guideline) in order to increase employment and reduce unemployment? 2  4  Report 29 (2000-2001) to the Storting: Guidelines for economic policy. BIS Review 50/2002  There are various factors that can prevent the interplay between monetary and fiscal policy from 3 functioning. Interplay functions well when the decision-making bodies are conscious of how one body’s decisions influence the decisions of the other. Unless this fact is recognised, a decision will not produce the result that was planned. The economy may move in a very undesirable direction, with 4 high interest rates, sluggish economic growth and deterioration in the state’s financial position. However, even without continuous coordination, a fairly good result may be achieved if fiscal policy 5 acts as “leader” and monetary policy as “follower”, to use expressions taken from game theory. The authorities determine fiscal policy knowing how monetary policy will react. Today’s flexible inflation targeting establishes a firm framework for monetary policy and provides clear guidelines on how monetary policy is to respond in different situations. The fiscal policy authorities can internalise the monetary policy response pattern. This is only natural, since the mandate for monetary policy was laid down by the Government and the Storting.