Svein Gjedrem: Making use of the central bank
Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway),
at Norges Bank's Symposium "What is a useful central bank?", Oslo, 17 November 2010.
* * *
The text below may differ from the actual presentation.
In his first year as governor of Norges Bank in 1985, Hermod Skånland gave a speech
entitled: "Making use of the central bank".1
Skånland compared the independence of the Bundesbank with Norges Bank's position in the
government administration under the credit rationing policy of the time here in Norway. He
said: "In Norway, where no great degree of power has been given to the central bank, it must
develop other qualities." The Bank was to be efficient in its operations and function as a
sound adviser for the government authorities.
But in the course of Skånland's years as governor, Norges Bank's role changed - the
interest rate once again became an active monetary policy instrument.
The Norges Bank of today is a result of its own and the country's economic history. Although
the Bank's role is influenced by central bank developments in other countries, we also have
our own legal traditions and our own way of organising government administration. The tasks
assigned to the Bank are also supported by modern economic theory.
A central bank is different from other public bodies in that it has its own balance sheet,
independent budgetary authority and its own accounts. To build confidence in the Bank over
time, the central bank must manage this form of autonomy in a sound manner. I have
emphasised the importance of an efficiently run central bank that concentrates on core tasks.
Over the past 10-12 years, the number of central banking staff in Norges Bank has been
reduced from 1200 to 300 (see Chart 1). This is an adequate staff level. We no longer
produce statistics, and we are no longer a manufacturing enterprise. We issue the currency,
but we do not print banknotes or mint coins. The distribution of money has been taken over
by private business.
As a result, we have been able to reduce the Bank's operating costs by about
NOK 600 million per year, measured at constant prices.
At the same time, the Bank's equity capital has increased more than twofold and now stands
at close to NOK 70 billion (see Chart 2). The central bank's formal independence must be
supported by a solid capital base.2
The objectives pursued by the central bank are for the common good. The objective of
monetary policy has always been determined by the government and the Storting
(Norwegian parliament) and was for a long period set out in an Act. Norges Bank has issued
notes and coin throughout its history, for the first hundred years based on the silver or gold
standard.
However, Norges Bank's tasks have otherwise varied over time.
We manage the Norwegian oil fund, which was a natural step in light of Norges Bank's
management of foreign exchange reserves. The fund will not, however, be one of the topics
of my speech today.3
The origins of Norges Bank
Norges Bank was established in 1816 as a limited liability company, privately owned but
under the control of the Storting. It was Norway's first bank. The Napoleonic Wars had been
costly for Denmark and eventually led to hyperinflation. In order to secure confidence in the
new specie daler, Norges Bank had to be independent.4 The intention was to make it difficult
for the government and the Storting to influence the central bank. The Bank's headquarters
were located in Trondheim, a 12-day journey from the capital.5
The Bank's tasks were to issue Norwegian notes and coin with a stable value measured in
silver, perform banking services for the government, provide loans and take deposits. Equity
capital was procured by introducing a silver tax. The silver standard was replaced by the gold
standard in 1874, and the following year saw Norway's entry into the Scandinavian Currency
Union. The Norwegian krone became the new currency unit.
Norges Bank as the bankers' bank
Norges Bank became a more modern institution with the Act of 1892.6 It became a bank for
the banks that had emerged and a common national discount rate was introduced.
The note issuing rules were also changed to enable Norges Bank to meet bank demand for
liquidity more easily. It was legally established that Norges Bank would be the government's
treasurer.
The Bank remained legally independent of the government authorities in its use of
instruments: the Act of 1892 reconfirmed that Norges Bank could not be given instructions by
the government or the Storting and Bank decisions could not be reversed by other
authorities. The contemporary ideal was an independent central bank.7
At the same time, a permanent chair and deputy chair were assigned to Norges Bank's board,
both appointed by the government. The other board members were appointed by the Storting,
as were the members of the Supervisory Council who were responsible for supervising the
Bank. It would seem that the need to distinguish between different roles was not very firmly
rooted: the first permanent chair of the board, director Karl Gether Bomhoff, was also a
parliamentary representative.8 He was, by the way, one of Henrik Ibsen's few friends.9
In 1897 the Storting had enough confidence in the independence of the central bank to
relocate Norges Bank's head office to Kristiania (now Oslo). Payment by cheque was
introduced in Norway in the same year, and from 1898 Norges Bank functioned as
settlement bank for payments between private banks.10
The more flexible note issuing rules proved very useful during the Kristiania crisis in 1899.
The crisis followed a housing and construction bubble in the capital. This was the first time
the central bank acted as lender of last resort for the banks.
Boom, banking crisis and parity policy
The fairly stable years that then followed after the turn of the century came to an abrupt
end
with the outbreak of World War I.
5
Lars Fredrik Øksendal (2008): "Trondhjem som hovedsete for Norges Bank - noen faktiske og kontrafaktiske
betraktninger" [Trondheim as Norges Bank's headquarters - some factual and counterfactual considerations],
Staff Memo 2008/8, Norges Bank.
6
See Oskar Jaeger (1894): "Udsigt over de forandringer, som Norges banks virksomhet har undergaaet ved
den nye banklov" [Changes in Norges Bank's operations as a result of the new Norges Bank Act].
Statsøkonomisk tidsskrift.
7
Gunhild Ecklund (2008): "Creating a new role for an old central bank: The Bank of Norway 1945-1954." Series
of Dissertations 2/2008, BI Norwegian School of Management.
8
There was one parliamentary representative on the board as late as 1983.
9
Ivo de Figueiredo (2007): Henrik Ibsen. Masken [Henrik Ibsen. The Mask], Aschehoug.
10
See Harald Haare (2007): "Clearing and settlement at Norges Bank - a historical review", Economic Bulletin
4/2007.
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Norges Bank's obligation to convert banknotes into gold was suspended, and the central
bank provided funding for increased government activities and other purposes.11 The gold
standard ideal of an independent central bank was abandoned during the war. There was
strong credit growth. The discount rate was kept low and there was a surge in government
spending, while prices for our exports soared and foreign inflows of gold were substantial.
The combination resulted in a boom period followed by a stock market crash, a banking crisis
and a fall in monetary value.
Francis Sejersted wrote the following about the appointment of Nicolai Rygg as governor of
"When [Prime Minister] Gunnar Knudsen [in 1920] called Rygg to the
Norges Bank in 1920:
position of chairman of Norges Bank's board, his aim was to secure the services of a strong
and knowledgeable man. Gunnar Knudsen suspected an economic storm was brewing, and
he suspected something that to a great extent was his own responsibility, namely that
monetary policy had been neglected during the war. It is important to keep this in mind in any
judgement of Rygg - that he took over an estate that had fallen into grave disrepair. The
monetary and fiscal policy pursued during World War I had been lax to a degree that was
completely unnecessary".12
Norges Bank now aimed to raise the value of the Norwegian krone and lower the price of
gold by means of so-called "parity policy". This line of approach was followed by most
advanced economies to restore pre-war exchange rates. A system of stable and convertible
currencies was regarded as essential to growth in global trade.
Rygg moreover regarded restoring the value of the krone to its former gold parity as a moral
obligation.13 The Norwegian government held substantial debt in sterling and US dollars and
he felt it was important to settle Norway's debts in money of the same value as previously.
The same applied to small depositors - they were to feel secure that their money would keep
its value over time.14
But the central bank also had a banking crisis to deal with. Funding was supplied, partly by
Norges Bank and partly by the Treasury, to keep the banks afloat. It took time to restore
confidence in the krone and for parity policy to be effective. It was not until May 1928 that the
krone was pegged to gold at par.
11
For an overview of legislative amendments in connection with World War I, see Carsten Smith (1980):
Bankrett og statsstyre [Banking law and public governance.
12
Francis Sejersted (1973): Ideal, teori og virkelighet. Nicolai Rygg og pengepolitikken i 1920-årene [Ideals,
theory and reality. Nicolai Rygg and monetary policy in the 1920s]. J.W. Cappelens forlag.
13
In their book Norsk økonomi i det 20. århundre [The Norwegian economy in the 20th century], Fritz Hodne and
Ola Honningdal Grytten refer to a lecture given by Gustav Cassel, a Swedish economist of international
renown, at the Federation of Norwegian Industries on 23 November 1923, where Cassel argued that in
Norway's case a devaluation might be an advantage. This offended Rygg, who reminded Cassel that Norway
had trodden a difficult path before, and could do so again. Just before he took office, Rygg had written a book
about the history of Norges Bank 1816-1916 and had the years 1822-1842 in mind, when 20 years of
deflation had been needed to bring the speciedaler back to its former gold parity. He wrote: "The [monetary]
regime is anchored in our legal system, which must be respected. Inherent therein is a moral obligation to
restore the monetary system to its previous condition. I know the road ahead of us is long, but I would for my
part emphasise that we will follow that road." From the newspaper article: "Veien og viljen. Et spørsmaal, hvor
nordmaend alene har ansvaret. Av direktør N. Ryggs svar til professor Cassel" [The way and the will. An issue
for which Norwegians alone are responsible. On Director Rygg's response to Professor Cassel]. See also:
Wilhelm Keilhau (1952): Den norske pengehistorie, [Norwegian monetary history] Aschehoug for a review of
the discussion between Rygg and Cassel.
14
At that time, small savings played a key welfare function in society. See Francis Sejersted (1973): Ideal, teori
og virkelighet. Nicolai Rygg og pengepolitikken i 1920-årene. [Ideals, theory and reality. Nicolai Rygg and
monetary policy in the 1920s]. Cappelen.
BIS Review 154/2010
The government and the Storting left much of the responsibility for economic policy to
Norges Bank.15 The recommendation by the Standing Committee on Finance and Economic
"The majority finds that it
Affairs in the central bank's annual report for 1924 reads as follows:
does not possess the necessary knowledge of all the interacting factors which under these
difficult circumstances must affect Norges Bank's decisions to be able to perform a critical
16
review of these decisions."
In Berge Furre's words, there was: "... general agreement on the goal - the gold krone - from
17
the political right to the political left."
After the value of the krone had been brought back to gold parity, the international crisis
reached Norway. Starting in the US in 1929, it led to falling prices and wealth losses in all the
western economies. The gold standard was an important channel of contagion. Uncertainty
led to capital flight to countries with substantial gold reserves, such as the US. Countries with
small reserves had to maintain a high interest rate to prevent substantial gold outflows. In
September 1931, the UK decided to abandon the gold standard. Denmark, Sweden and
Norway brought gold redemption to a halt in the same month.
Norges Bank was put to a severe test in the interwar period. Nicolai Rygg's lot was to resolve
the problems left by the policy conducted during and just after the war. His approach was on
a par with international practice at the time.18 Although he had his critics, not all the criticism
levelled against him would necessarily be regarded as equally well founded today.
The general view of Rygg has become more balanced.19 But the perception of Rygg and
Norges Bank in the interwar years, that subsequently became ingrained, had an impact on
the tasks that were later assigned to the central bank. The pendulum swung towards less
independence for Norges Bank, since the Bank was held responsible for the recession. This
impression prevailed for such a long time that it also came to influence the current Norges
Bank Act.
The scepticism was clearly expressed by Kåre Willoch, who was prime minister when the
new Act came into effect in 1985: "[Nicolai Rygg] was held primarily responsible - and
15
In 1926, Minister of Finance Holmboe, of the centrist-liberal party Venstre, said: "It is however a well known
fact that wherever governments have assumed authority over the national bank, the outcome has been
unfavourable because vested interests have been so considerable and the temptation so strong that it was
impossible to resist, and the government has helped itself to the national bank's cash...". In Francis Sejersted
(1973): Ideal, teori og virkelighet. Nicolai Rygg og pengepolitikken i 1920-årene. [Ideals, theory and reality.
Nicolai Rygg and monetary policy in the 1920s]. J. W. Cappelens forlag.
16
In Francis Sejersted (1973).
17
Berge Furre (Norwegian historian, theologian and politician for the Socialist Left Party), (1999): "Norsk historie
1905-2000: Industrisamfunnet - frå vokstervisse til framtidstvil" [History of Norway 1905-2000: from
confidence in growth to doubts about the future], Det Norske Samlaget.
18
For a lively description of the personalities governing the large central banks in the 1920s, see Liaquat
Ahamed (2009): The Lords of Finance. The bankers who broke the world. Penguin Books.
19
Hermod Skånland writes about the need to hold someone accountable for the hardships of the 1920s: "The
government is usually a good target for criticism, but there is little appeal in firing shots at a government that is
no longer in office, and through the 1920s there had been so many governments that no single government
stood out as more responsible than others. On the other hand, there had been one central bank governor,
who had also been a prominent figure. Nicolai Rygg became the obvious scapegoat, open to attack from both
the masses and from historians, without any economists springing to his defence.
Thus, the myth became established that the economic difficulties of the 1920s were due to parity policy, and that
Nicolai Rygg was responsible for them. From there, it was only a short step to a general scepticism towards
monetary policy combined with a more specific distrust of central banks and central bank governors." Hermod
Skånland (1998): "Mytedannelsen om paripolitikken" (Myth-making about parity policy), Aftenposten 30 May.
BIS Review 154/2010
virtually solely responsible - for a policy that became a crucial deterrent to central bank
20
independence for generations of economists and politicians - myself included."
The postwar period of coordination and regulatory optimism
Views on economic policy changed considerably from the end of the 1930s. The Bretton
Woods system of fixed exchange rates against the US dollar was established, with the
US dollar pegged to gold. Both John Maynard Keynes' theories and analytical tools
developed by Norwegian economists such as Ragnar Frisch and Trygve Haavelmo
generated regulatory optimism, which laid the basis for a new approach to economic
planning, for example through the annual national budgets.
Fiscal policy - changes in public spending and taxes - was now regarded as the most
important instrument for smoothing economic fluctuations. The use of direct regulation of the
economy increased. The role of interest rate policy was toned down considerably.21
Centralised planning gained ground, with the Ministry of Finance playing a prominent role. As
a result, there was also a shift in Norges Bank's responsibilities, with the full agreement of
the Bank. In his first annual address in 1946, Governor of Norges Bank Gunnar Jahn said: "It
goes without saying that a bank of issue cannot and should not conduct a policy that is
inconsistent with that determined by the Storting and the government."
Coordination with government policy was formally strengthened in 1949 when the
government acquired all the shares in Norges Bank. In addition, the Bank's annual report
was to be sent to the Ministry of Finance and no longer directly to the Storting.
Corporatist channels became important, providing some scope for a central bank in search of
a mission.
Samarbeidsnemnda (the Cooperation Committee), a body established in 1951, comprised
commercial and savings banks, insurance companies, the Ministry of Finance, the Banking
Inspectorate and Norges Bank, with the central bank governor as chair.
Erik Brofoss, the head of Norges Bank from 1954, was enthusiastic:
"During discussions about monetary policy and other economic issues, Norges Bank has
often found itself in the position of having to find intermediate solutions that could convey the
positions adopted by the Ministry of Finance and by private financial institutions. The actual
influence Norges Bank has had in this respect both vis-à-vis the Ministry and the private
22
financial institutions extends far beyond its formal statutory authority."
This line of thinking seems very remote to us today.
Regulatory optimism was the hallmark of the 1960s,23 and with the Act authorising the
regulation of monetary and credit conditions of 1965,24 which was an enabling Act conferring
20
Kåre Willoch [1994]: "Hvor uavhengig bør sentralbanken vaere?" [How independent should the central bank
Stabilitet og langsiktighet. Festskrift til Hermod Skånland
be?], in [Stability and long-termism. Festschrift to
Herman Skånland], Aschehoug.
21
For example, Governor Erik Brofoss later said: "... the impact of the interest rate, which was once virtually the
only monetary policy instrument, is now far more limited in scope." In Erik Brufoss (1959): "Sentralbankens
statsrettslige og forvaltningsrettslige stilling" (The central bank's position in relation to constitutional and
administrative law]. Lecture given on 27 October. Published in Statsøkonomisk tidskrift 1960, pp. 1-31.
22
Erik Brofoss [1959]: "Sentralbankens statsrettslige og forvaltningsrettslige stilling" [The central bank's position
in relation to constitutional and administrative law]. Lecture given on 27 October. Published in Statsøkonomisk
tidskrift 1960, pp 1-31.
23
Tore Jørgen Hanisch, Espen Søilen and Gunhild Ecklund (1999): Norsk økonomisk politikk i det 20. århundre.
Verdivalg i en åpen økonomi [Norwegian economic history in the 20th century. Ethical choices in an open
economy] Høyskoleforlaget, Kristiansand.
24
The 1965 Credit Act and the 1950 Act relating to currency control were not repealed in their entirety until 2003.
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authority on the government, Norges Bank gradually drifted into an advisory role. Corporatist
collaboration receded somewhat into the background and credit policy was integrated into
the national budget.25
This was probably an all-time low for Norges Bank. The Bank was not allowed to act, while
inflation gained momentum.
When Hermod Skånland began working in Norges Bank as deputy governor in 1971, he was
warned by his colleagues at the Ministry of Finance. Later, he said: "... they did not know how
right they were to ask their questions. They [had no idea] how little there was to do of any
interest in Norges Bank at that time. It had no instruments, no policy tasks and was wholly
and exclusively a supervisory body - apart from the few occasions when it served as a
consultative body. So I had placed myself on the sideline, but I compensated by offering to
26
chair a number of public commissions."
Governor Knut Getz Wold wrote in 1972 that: "Norges Bank's position today in relation to the
government authorities is not, however, defined by a formal right to make decisions on
specific issues, but by its role as advisor ...". He went on to say: "Norges Bank has limited
direct power. This is as it should be. But it has, and should have, influence. If store is to be
set by its word, it must keep abreast of developments at home and abroad. The Storting and
the government have the final word. Having said that, Norges Bank will loyally and actively
27
follow up their decisions."
In 1973, the efforts to develop an economy under strong centralised coordination and control
culminated in a proposal to establish an incomes policy council with regulation of wages.28
The proposal was logical. It was the last wall in the structure erected after the war.
Coordination and regulation were important key words. Other elements were:

Fiscal policy oriented towards full employment

Credit regulation within limits specified in a separate credit budget

Channelling of loans through state banks

Regulation of capital movements

Low nominal interest rates stipulated by the government authorities

A fixed, though adjustable, krone exchange rate
 Use of price regulation

An active business policy through state ownership and state grants and subsidies
The proposal to establish an incomes policy council did not receive support. Government
regulation and coordinated wage regulation became excessive.29
25
The collaboration between the authorities and bankers' associations did not disappear completely. In the
economic policy tightening of 1979 and 1980, the "konsumlånsforståelsen" (consumer loan understanding)
played an important role. Banks undertook to reduce lending to households. This led to a marked rise in
saving.
26
In Økonomisk Rapport Magasin, 12 January 2002: "Graver Gjedrem sin egen grav?" [Is Gjedrem digging his
own grave?].
27
Knut Getz Wold (1972): "Norges Banks samarbeid med statsmaktene, bankene og utlandet," [Norges Bank's
cooperation with government authorities, the banks and bodies abroad],Kristofer Lehmkuhl Lecture, Norges
Handelshøyskole 20 September.
28
See NOU [Official Norwegian Report] 1973:36. Om prisproblemene [On price problems].
29
See NOU [Official Norwegian Report] 1983:36 Om prisproblemene [On price problems].
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Today's economic policy frameworks are partly a reflection of the experiences of the 1970s
and 1980s, both in other countries and in Norway.
The Bretton Woods system collapsed when the US deficit-financed the Vietnam War and
extensive welfare reforms, while interest rates were kept low. The gold standard had to be
abandoned, inflation rose and an oil price shock was triggered. A shortfall in production and
unemployment followed in its wake.
Norway imported high inflation, and domestic inflation was also amplified by galloping wages
and a series of krone devaluations.
High inflation undermined the regulation of the credit market. We had had a low nominal
interest rate for a long period - several decades - but inflation had also been moderate.
From the end of the 1960s, this changed. The real interest rate became highly negative. In
addition, galloping wages drove incomes into higher tax brackets, resulting in higher marginal
taxation, and the after-tax real interest rate became even more negative. The regulation of
credit was not able to stem the tide of credit demand that ensued.
The Norwegian money market became more closely integrated with a growing Eurodollar
market at that time. This was partly because oil companies had to exchange their US dollar
revenues into NOK for tax payment purposes.
The regulatory regime was imploding.
The interest rate regains its role as a policy instrument
After the drop in oil prices and the last devaluation of the krone in 1986, the interest rate had
to be set to support our currency. The alternative was further devaluations, high inflation and
economic instability. With a binding commitment to a fixed exchange rate policy from early
summer 1986, interest rate setting was largely shifted to Norges Bank.30
High inflation is associated with substantial real economic costs. This came into evidence
when we managed to bring inflation under control again in Norway at the end of the 1980s.
The fixed exchange rate policy was crucial in this context (see Chart 3).
Perhaps we can say that the pendulum had swung back from the view that prevailed in the
early years after the war. At that time, it was not Norges Bank, but on the contrary fiscal
policy and the detailed regulatory system that had failed. Norges Bank had to be given a
greater role again in promoting a well functioning economy.
Later, it would transpire that having brought inflation under control and a series of
farreaching structural reforms in the 1980s and early 1990s, would pave the way for two golden
decades in the Norwegian economy.
Throughout the 1990s, the objective of monetary policy was to stabilise the krone and
thereby make a contribution to low inflation. The central government budget was to smooth
fluctuations in output and employment. This became increasingly demanding as favourable
economic developments and oil revenues generated government surpluses. Both the interest
rate and the government budget had then, in periods, the effect of amplifying, not
dampening, cyclical developments. This resulted in fluctuations in the krone exchange rate.31
Norges Bank was forced to recognise that it could not fine tune the exchange rate from day
to day or month to month. Nor would the Bank knowingly contribute to fuelling inflation or
deflationary downturns. Interest rate policy was then instead geared to keeping inflation in
line with euro area countries. As from 1999, the Bank's policy was in practice oriented
towards an inflation rate of around 2 per cent.32 Keeping inflation low and stable is the best
contribution monetary policy can make to economic stability and a stable krone exchange
rate.
A formal inflation target - with a target of 2.5 per cent - was introduced in Norway in
March 2001. The new monetary policy framework was introduced at the same time as the
government drew up new fiscal policy guidelines that provided for a gradual, albeit
sustainable, phasing in of oil revenues into the Norwegian economy.
Independence in the use of instruments - a premise for stability of the value of money
A number of considerations weigh in favour of setting objectives and delegating tasks to
government institutions. This can ease the central authorities' workload. The central
government can also seek to ensure that government agencies fulfil their responsibilities by
giving them clear objectives and instruments. Furthermore, clear objectives and delegation of
tasks may enhance predictability for other economic agents.
In economic policy it is commonly argued that certain long-term objectives can be achieved
only if short-term considerations are not allowed to influence the use of policy instruments.33
This is the case for monetary policy and inflation targeting.34 There may be a desire to
achieve higher, yet unsustainable, growth in output and employment through a low interest
rate. But economic agents are aware of this temptation. If they cannot be confident that the
key rate is set to ensure stable inflation, they will expect higher inflation over time. The
31
Kjell Storvik, Governor of Norges Bank from 1994 to1999, stated in a lecture at FOREX NORWAY on
28 August 1998: "I would point to the well-known fact that a lower krone exchange rate may contribute to
fuelling inflation expectations and that such expectations may in turn generate expectations of a weakening of
the krone exchange rate, thereby reinforcing depreciation pressures. Price expectations may thus prove to be
a self-fulfilling prophecy. The interest rate level which has now been established should, in addition to directly
contributing to stabilising the krone exchange rate, dampen price expectations."
32
Svein Gedrem (1999) "Utfordringer i pengepolitikken" [Monetary policy challenges], Aftenposten, 4 May.
33
Kydland, Finn E. and Prescott, Edward C. (1977): "Rules Rather than Discretion: The Inconsistency of Optimal
Plans." Journal of Political Economy No. 87, pp 473-492.
34
Barro, Robert J. and David B. Gordon (1983): "A Positive Theory of Monetary Policy in a Natural Rate Model",
Journal of Political Economy No. 12 pp. 101-121.
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long-term cost can be considerable and the short-term gains limited. Norway and other
countries learned this in the 1970s and 1980s.
The British prime minister Harold Wilson once remarked, "A week is a long time in politics".
This attitude also influenced economic policy in our country. The result was economic
instability, with both high inflation and high unemployment. Just as Ulysses had himself tied
to the mast to resist the Sirens'35 temptations, the government authorities can prevent
themselves from pursuing a policy that is harmful in the long run by setting objectives and
delegating tasks.
A central bank should be independent in its use of policy instruments, though the objective of
monetary policy should naturally be set out by the government and the Storting.36
The division of responsibility was clearly defined when the government presented its
guidelines in 2001.
Since the various elements of economic policy differ in their effects, they have different tasks:

Monetary policy now steers inflation in the medium and long term and can in
addition contribute to smoothing fluctuations in output and employment.

The central government budget - growth in public expenditure, which must be
sustainable in the long term - influences the krone and the size of the internationally
exposed sector in the medium term.

Wage formation and economic structures and incentives provide the basis for
efficient use of our labour resources and other economic resources, and for
economic growth.
There is also an interaction:

In their budget resolutions, the government authorities will attach importance to the
effects of the budget on the Norwegian economy and will therefore take account of
the effect on the interest rate. In this way, they avoid a situation where growth in
public expenditure and the interest rate push the economy in different directions.

With a known monetary policy response pattern, the parties to the centralised
income settlements can take into account interest rate effects when wage increases
are agreed.

Moreover, the parties to public sector negotiations can take into account that the
higher the pay increases are, the fewer there are who can be remunerated over
government budgets.
Norges Bank Act of 1985 - a framework for today's monetary policy
The Norges Bank Act, passed in 1985, governs monetary policy.37 The Act was drafted in the
light of Norges Bank's role in the postwar government administration. Therefore, the new
Executive Board, which replaced the board of directors under the 1892 Act, is now appointed
by the Council of State.
Under the Act, Norges Bank is an executive and advisory body for monetary, credit and
foreign exchange policy and shall monitor developments in the money, credit and foreign
exchange markets.
The Act makes no reference to the objective of monetary policy. On the contrary, its
formulations are completely open-ended.38
The Bank shall conduct its operations in accordance with the economic policy guidelines
drawn up by the government authorities. How this was to be interpreted was the subject of
controversy in the first years. Today, in the light of both the text of the Act and of the
preparatory works, the implications of this may also be unclear. This provision has not gained
any further practical significance. Today, Norges Bank no longer looks for guidelines in public
documents. The reason is that the inflation target, which is governed by regulation in
pursuance of other provisions of the Act, provi