(1993): “Discretion versus policy rules in practice,” Carnegie Rochester Conference Series on Public Policy 39, and Henderson, D. and W. McKibbin (1993): “A comparison of some basic monetary policy regimes for open economies: Implications of different degrees of instrument adjustment and wage persistence,” Carnegie-Rochester Conference Series on Public Policy, 39. BIS central bankers’ speeches  1  framework with both forward-looking agents and monetary policy specified in terms of the key interest rate. Under this framework, monetary policy becomes more powerful if the agents understand the reaction pattern of the central bank. When a disturbance hits the economy, the policy response required to stabilise the economy is smaller if the central bank can affect the whole term structure than if monetary policy only works through the short-term interest rate. 3 However, the importance of forward guidance depends on the degree to which expectations are forward-looking. In principle, economic agents may be able to calculate how the central bank will respond to changing conditions if they know both the model of the economy and the objectives and reaction pattern of the central bank. Expected future interest rates may then align well with the central bank’s own interest rate intentions, and there will be no need for the central bank to communicate its policy intentions. In practice, a model description of the economy is just that – a model, which always will be a simplification. The central bank’s reaction pattern may also be adjusted over time.
5  In addition to New Zealand and Norway, the central banks in Sweden, the Czech Republic and Israel currently publish interest rate forecasts. In addition, the Federal Reserve publishes the individual interest rate forecasts of the members of the Federal Open Market Committee (FOMC). 6  Norway’s sovereign wealth fund (the “Government Pension Fund Global”) is managed by Norges Bank Investment Management (NBIM) and is invested in international capital markets. 7  For details on our institutional framework, see Qvigstad, J. with I. Fridriksson and N. Langbraaten (2013): “Monetary policy committees and communication,” Norges Bank Staff Memo 2/2013. BIS central bankers’ speeches  3  [Chart:Timeline: The first years of Norges Bank forward guidance] In 2004, we started to publish our first quantitative guidance in the form of a “strategy interval” for the key policy rate four months ahead. In November the following year, we published for the first time our own interest rate forecast for the next three years. Prior to that, we had established and published criteria for an appropriate interest rate path. 8 Up until November 2005, the analyses and forecasts in our reports had been based on either a constant interest rate path or an interest rate path as implied by the forward market. At this point however, our conclusion was that it would be easier to interpret, evaluate and communicate our view of the economy when it was based on a path for the interest rate that we considered to be appropriate.