BIS Review 136/2008  9  higher inflation without lower unemployment in the long term. Credibility hinges on the active use of the interest rate to attain the target. The lawyer and economist Michael Woodford has pointed out that in order to keep your word it is not enough to make a promise today and keep your word tomorrow. 37 When making interest rate forecasts, we must also take into consideration the promises made yesterday. Only then can we fully use expectations to stabilise the economy optimally. This is referred to as monetary policy from a timeless perspective. 38 My understanding is that a person will likewise both look backward and forward when interpreting the laws of a society. It is Norwegian court practice for judges to consider precedent effects and case law when interpreting legislation. Today there is general consensus that price stability is not only the best contribution that monetary policy can make to economic stability over time, but perhaps also the only promise the central bank can actually deliver. 6. Today’s financial crisis  These days the world is in the throes of a severe financial crisis – the deepest crisis since the 1930s. Many foreign banks have suffered large losses and a sense of fear is prevailing. We are entering a global economic recession. The authorities are taking action to restore confidence in the financial industry. Macroeconomic policy measures are aimed at limiting the crisis-related effects on the real economy.
The krone exchange rate is the price of our currency measured in a foreign currency. Developments in other countries are just as important for the krone as developments in the Norwegian economy. Capital flows freely and flows can change rapidly. This can spill over to exchange rates and interest rates as well as output and employment. There is a cost involved for businesses in hedging against fluctuations in the krone. A krone that is stable - but too strong - also entails social costs in the form of low activity. Likewise, a krone that is stable - but too weak - is a source of high inflation. Norway is running a current account surplus as a result of sizeable oil and gas exports. Owing to high oil prices, the current account surplus is rising this year. An increase in the current account surplus will normally result in higher net demand for the domestic currency. In Norway, however, the additional foreign exchange revenues that accrue to the Norwegian state as a result of high oil prices will be invested in foreign securities through the Government Petroleum Fund. As a result, they will not have a direct impact on the balance in the Norwegian foreign exchange market. Oil companies hold a large share of their financial capital in foreign currency, and higher revenues in these companies therefore results in an increase in capital outflows.