However, in such a case, the reason for such deviation should be carefully explained. This rule of action played a significant role in the development of a more efficient and transparent monetary policy at a point in time when the inflation target policy was still relatively young and untested, but it is now obsolete and has been abandoned. However, it is important to retain the principle that deviations from quantitative targets may arise but that such cases should be carefully explained. Deviations from the inflation target may arise but such cases should carefully be explained. In the same manner, it is possible to imagine situations in which it may be justifiable to deviate from the best possible degree of stability in inflation and resource utilisation, but the justification for such deviations should then be carefully explained, so that external analysts can determine whether these deviations are reasonable. From this perspective, the use of the mean squared gaps forms just one more step towards a more systematic and transparent inflation targeting, in which central banks can be evaluated and held responsible for their decisions with even greater accuracy than before, after the introduction of numerical inflation targets, published forecasts for inflation and the real economy, published policy-rate paths, detailed and attributed minutes and other important steps taken in the development of a systematic and transparent monetary policy. BIS Review 22/2010  11  References  Bergo, Jarle (2007), “Interest Rate Projections in Theory and Practice”, speech held at Samfunnsøkonomenes valutaseminar at Sanderstølen, 26 January 2007, www.norgesbank.no.
As usual, it is necessary to consider all information, where, in practice, the assessment of effects not covered by models is of great significance. If something cannot be considered to affect the expected value of future inflation and resource utilisation, then monetary policy does not need to react to it.7 Kohn (2006, 2008) mentions three conditions that should be fulfilled before central banks implement “extraordinary measures” to handle possible asset price bubbles, such as the  7  8  See Svensson (2003) for a discussion of monetary policy with extreme outcomes with low probability. BIS Review 22/2010  unsustainable development of housing prices: “First, policymakers must be able to identify bubbles in a timely fashion with reasonable confidence. Second, a somewhat tighter monetary policy must have a high probability that it will help to check at least some of the speculative activity. And third, the expected improvement in future economic performance that would result from the curtailment of the bubble must be sufficiently great.” As these conditions are very seldom fulfilled in practice, it is very seldom that the issue arises, in practice, of allowing asset prices to influence monetary policy.8 It has occasionally been claimed that a central bank should be cautious as regards lowering the interest rate to very low levels, as this would be venturing into unfamiliar waters. I object strongly to “unfamiliar waters” being an argument against cutting the repo rate.