Jan F Qvigstad: On institutions - fundamentals of confidence and trust
Speech by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway),
at the Norwegian Academy of Science and Letters, Oslo, 12 November 2013.
The text below may differ from the actual presentation. This speech does not contain assessments of the
economic situation or current interest rate setting.
* * *
I have received valuable assistance in drawing up this speech, in particular from Mike Bordo, Arne Jon Isachsen,
John Llewllyn and Anders Vredin outside Norges Bank, and from Norges Bank staff; Øyvind Eitrheim, Amund
Holmsen, Marie Norum Lerbak, Inka Rogne, Øystein Sjølie, Birger Vikøren and Jan Fredrik Øksendal. I would
also like to thank Helle Snellingen for the translation into English.
Institutions
The concept institution has many meanings. For example, there is an important distinction
between its meaning as an abstract concept and as a concrete one. The judicial system in
Norway is an institution in an abstract sense, while the Supreme Court is concrete. The
Norwegian Opera & Ballet is a concrete cultural institution within our more abstract cultural
Norges Bank
heritage. In my own field, the monetary system is abstract whereas is concrete.
I would like to speak about the role institutions can play in the economic advancement of a
nation and use the central bank as an example.1 My co-speakers will view the issue from
different perspectives and the ensuing debate will bring forth yet further aspects.2
Good institutions provide sound frameworks that increase confidence and promote economic
progress. This is so in relation to minor, everyday situations as well as to major life choices.
Norwegian Metrology Service
At the fishmonger's, the ensures that you pay for the actual
weight of your cod fillet. When you buy a home, clarity about ownership and encumbrances
is ensured by the land register.3 The Norwegian Industrial Property Office grants patents so
that entrepreneurs can make profits on their innovations. In the absence of such institutions,
each of us would have had to spend more time on taking precautions and fewer investments
would have been profitable.4
1
Among the many who have shed light on the role of institutions from this perspective is Douglass C. North, a
1993 Nobel laureate in economics together with Robert W. Vogel. In his work, he refers to institutions as:
"Institutions are the rules of the game of a society and in consequence provide the framework of incentives
that shape economic, political, and social organization. Institutions are composed of formal rules (laws,
constitutions, rules), informal constraints (conventions, codes of conduct, norms of behaviour), and the
effectiveness of their enforcement. Enforcement is carried out by third parties (law enforcement, social
ostracism), by second parties (retaliation), or by the first party (self-imposed codes of conduct). Institutions
affect economic performance by determining, together with technology employed, the transaction and
transformation (production) costs that make up the total costs of production." See North, Douglass (1997) in
Prologue of Frontiers of the New Institutional
Drobak, J. N. (Ed.): Economics, p. 6.
2
Economists use a basic and powerful theoretical construct to demonstrate that, at the most fundamental level,
production takes place through the use of labour, capital and raw materials as well as through technological
progress. Lying behind it - and often having a profound effect on it - is how firms and the society in which the
firms operate are organised. And organisation is about institutions in the broad sense - everything from
society's moral norms to how production is organised in each firm.
3
The Mystery of Capital
Hernando de Soto in (2000) argues that a lack of proper land registration in poor
countries makes it impossible for the poor to obtain credit. As a result, a large proportion of the population is in
effect barred from establishing a business.
4
The Arab sociologist and diplomat Ibn Khaldûn analysed the relationship between institutions and economic
progress. He published his major work The Muqaddimah in 1377. The book was published in Norwegian this
year on the initiative of Nils Holme, the former director of the Norwegian Defence Research Establishment
(FFI). In 1759, in his work Theory of Moral Sentiments, Adam Smith wrote that institutions are the framework
However, in and of themselves, institutions are insufficient to ensure progress - the key is
whether they are strong or weak.5 This is also the starting point for Daron Acemoglu and
James Robinson's book Why Nations Fail.6 They introduced the concepts inclusive and
extractive institutions.7
•
Inclusive institutions do not forget why they exist: they remember that their purpose
is to serve the people, as the term "public servant" aptly illustrates. A well
functioning constitutional state makes cooperation and transactions simpler and
cheaper.
•
Extractive institutions, on the other hand, are found in countries where rulers govern
without notable opposition, where the judicial system is not fair, and where rights are
not equal for all.
The authors refer to several examples where people groups with identical backgrounds and
access to the same natural resources have developed differently because of institutional
differences.8
for progress. Good institutions promote confidence and thereby efficiency in society. The Norwegian American
Thorstein Veblen, 115 years ago, described institutions as the building blocks of economic development (see
The Theory of the Leisure Class: An Economic Study of Institutions). In newer Norwegian research, Halvor
Mehlum, Kalle Moene and Ragnar Torvik have documented that institutions determine whether a country will
manage to utilise discovered resources (see "Institutions and the Resource Curse", The Economic Journal
116, pp. 1-20).
5
The young and already internationally renowned economist Jeffrey Sachs called on the then Secretary
General of the OECD, Jean-Claude Paye, immediately after the collapse of the former Soviet Union. Sachs
claimed that all that was needed to get the economy moving was to liberate Russia's animal spirits. Paye
demurred, saying that he thought that institutions would matter too. Sachs countered, saying "But you are
French, and so you think that institutions are more important than they really are." To which Paye replied "And
you are young, and take your institutions too much for granted." And then he added, almost as an
afterthought, "If you do not have good, strong institutions, all you will get will be the mafia." E-mail
correspondence from John Llewellyn, former colleague of Paye's, dated 3 November 2013.
6
Why Nations Fail: The Origins of Power, Prosperity and
Acemoglu, D. and J. Robinson (2012): Poverty,
Crown Publishers, New York.
7
Acemoglu and Robinson are not alone in attempting to capture institutional differences using concept pairs. In
a historically based social analysis, North, Weingast and Wallis use the distinction between natural state and
open access societies as reference for stage of development. The former was a strongly hierarchical society
with tightly woven personal bonds with a clear social order. Collaborating elites had a monopoly on violence
and dictated the allocation of resources. In an open- access society, on the other hand, the state holds power
but there are institutional constraints. Political leadership has support from relatively broad economic and
social groups, with more impersonal relationships and hence stronger competition and mobility. The authors
argue that the transition between development stages to what they refer to as "the second social revolution", a
somewhat broader concept than the Industrial Revolution that gives weight to, inter alia, the Enlightenment
and Modernity, started over 200 years ago, and that it is still underway. In many countries, society has
benefited from technological progress but is still captive of the old stage of development of personal power
relationships. They point to a clear concurrence between the open-access society and economic prosperity.
"Violence and Social Orders: A
North Douglass C., Wallis, John Joseph and Weingast, Barry R. (2009)
Conceptual Framework for Interpreting Recorded Human History", Cambridge University Press.
8
Nation-building is a difficult task if there is no trust in as vital an institution as the police.
Johs Andenaes spent the spring semester of 1971 as a visiting fellow at Oxford, taking along his son Ulf, who
was my schoolmate. That year, Leszek Kołakowski, one of the past
century's most famous philosophers, was
also a visiting fellow at Oxford, and Johs Andenaes and Kołakowski became friends.
Although Kołakowski had been one of
Marxism's prominent post-war thinkers, by 1971 he had completely lost
faith in the ideals of his youth. His relationship with the same Communist authorities that he had served as an
ideologist earlier in his life was becoming increasingly difficult. When the end of Kołakowski's visiting
appointment neared, Johs Andenaes was told privately that Kołakowski was debating whether to defect and
remain at Oxford. Kołakowski was particularly repelled by a fellow Pole who was also
a guest professor and
whose loyalty to the regime he believed was sheer opportunism. To Johs Andenaes, Kołakowski spoke of his
countryman thus: "He is a criminal. He cooperates with the police!" As a professor of criminal law, Johs
This leads to a key question: what are the principles that underlie those institutions that
actually fulfil their role and effectively serve society?
A relevant starting point - as we are now approaching the bicentenary of the Norwegian
Constitution - is 1814. This was the time when key nation-building institutions were founded,
such as the Storting (Norwegian parliament), the Supreme Court, the University of Oslo and
Norges Bank. By the mid-1800s, civil society was also developing rapidly, as illustrated by
the surge in the number of associations. The historian Jan Eivind Myhre has described this
development in his book on Norway's history from 1814 to 1905. He relates, for example,
that 60 clubs and associations were established in Løten, Hedmark county, between 1850
and 1898.9 These ranged from shooting clubs, cycling clubs, choirs and agricultural
associations to local political, missionary and workers' associations. An array of common
arenas boosts trust between people in a society. Trust in strangers helps oil the machinery. If
you are able to trust the other party to the contract, you do not have to hedge against all
possible outcomes.10 The wheels of business turn faster and more smoothly.
The 1800s were characterised by upheaval and a change in the pace of economic
development. In the old society, safety lay in close-knit networks and small institutions: the
family, relatives and neighbours. Once the pace of development picked up, however, these
networks and institutions were no longer sufficient. New ones were needed.
Local savings banks are a good example. Specialisation, a market focus and new tools
demanded more financial muscle than the old, family-based networks could mobilise. The
solution was for villages to join forces to create savings banks, an institution rooted in the
local community but reaching beyond the old networks. Løten savings bank opened in 1855.
A good public school system is a prime example of an inclusive institution. In May this year, I
had the pleasure of visiting Stavanger Cathedral School. The head teacher, Turid Myhra,
showed a portrait of one of her predecessors, Johannes Steen; schoolmaster, statesman
and nation-builder.11
Steen was notably a key driving force behind what was to become an important milestone in
the construction of Norway's collective identity: the adoption of the Primary School Act in
an interesting statement. Kołakowski, for his part, did not return to Poland when his
Andenaes found this to be
visiting fellowship ended soon afterward, but defected and became a leading critic of Marxist theory and
practice and one of the intellectual fathers of Solidarity and the fall of Communism.
9
Myhre, Jan Eivind (2012): "Norsk historie 1814-1905: Å byggje ein stat og skape ein nasjon" [Norwegian
history 1814-1905: Building a state and creating a nation].
10
The level of trust in a society is influenced by many conditions. It may be that the recent years' large migration
flows are eroding the trust that has prevailed in Norway earlier. However, immigrants have in fact adopted
surprisingly rapidly the level of confidence in their new home country. See also Dag Wollebaek (2013): Truer
innvandringen tilliten? [Does immigration undermine trust?], Article in Aftenposten. Alexander Cappelen and
Bertil Tungodden at the Norwegian School of Economics are also working on these issues (see e.g.
http://paraplyen.nhh.no/paraplyen/arkiv/2012/juni/tillitstesten/). See also Algan and Cahuc (2010): "Inherited
American Economic Review
Trust and Growth", 100 (5), pp. 2060-92, who document a strong causal
relationship between trust and economic prosperity.
11
Johannes Steen (1827-1906) was born in Christiania (now Oslo). After completing a higher degree in
philology at the University of Christiania in 1848, Steen held a number of positions in the school system and
was for many years the headmaster of the Stavanger Latin School. Steen was also a member of the Storting
and prime minister. Both as an educationist and as a politician, Steen made key contributions to the creation
Store Norske
of the Norwegian comprehensive school. Source: Leksikon, http://nbl.snl.no/Johannes_Steen/
utdypning.
Internationally, the Society of Jesus is known as the founder of the modern school system, with a curriculum
tailored to the child's age and previous knowledge and schooling characterised by systematic progression.
These pedagogical principles evolved gradually through the second half of the 1500s, culminating in 1598 with
Ratio Studiorum, the official plan for Jesuit education (see O'Malley, J. W. (1993): The First Jesuits, Harvard
University Press, Cambridge, Massachusetts).
1889. The result was a comprehensive school system that strengthened our collective
identity.12
For Norwegians, it is easy to take inclusive institutions for granted. Throughout human
history, however, it is extractive institutions that have been the norm. There were attempts to
achieve a balance of power in regimes as disparate as ancient Rome, China and Venice. But
they remained attempts. The inclusive institutions were replaced by nepotism and abuse of
power.
The economists Acemoglu and Robinson point to the Glorious Revolution as a turning point
in history.13 The British Parliament permanently curtailed the power of the Crown. The UK did
not become a democracy in the modern sense overnight, but checks and balances were
introduced. The development of written laws and a judicial system featuring independent
courts started. Patent laws were adopted and limited companies saw the light of day. The
Bank of England, which was established in 1694, was controlled by the Crown's creditors.
This limited the Crown's scope for printing money freely. Acemoglu and Robinson maintain
that the Glorious Revolution paved the way for the Industrial Revolution.14
The monetary system
A man who makes pins on his own can make between one and 20 pins a day. However, if
the work is distributed among several workers such that one produces the wire, another
straightens it, someone else cuts it to size, yet another sharpens it, and so on, ten men can
produce 48,000 pins per day.
This is Adam Smith's famous example, taken from The Wealth of Nations, of how the division
of labour is important for productivity and economic prosperity.15 In Smith's example, all the
operations take place within a single factory. But in a more complex society, one firm's output
is another firm's input. An important prerequisite for such division of labour is that there are
institutions that facilitate simple trading of what is produced.
The monetary system is an institution that simplifies trade in goods and thereby promotes the
division of labour, productivity and economic prosperity. We must bear in mind that money
and the monetary system are not a goal per se. Money is like oil in the machinery.
Nevertheless, of all the systems existing within a state, the monetary system is among the
more mystical when examined closely.
Historically, the King issued money, initially in the form of coins. His stamp turned the coins
into a means of payment, and his power underpinned the monopoly on the issue of coins.
Many kings managed their coinage. One example is Henry VII, the father of the modern
English coinage system, whom historians have identified as an early proponent of healthy
money.16
His son, Henry VIII, was not as successful. From school, we best remember him for
12
Compulsory military service is also often quoted as a common area in which people from different
backgrounds met on an equal footing, and often formed closer bonds. Accordingly, the Norwegian Armed
Forces have not only helped to protect the country, but also developed Norway's social capital, at least that of
half the population (see also Langeland, N. R.: "Møtet med krigens ånd" [Meeting the spirit of warfare],
Morgenbladet, 1 November 2013).
13
Hermann, Richard (1992): Med Skjebnen I hånden [With Destiny in Their Hands], Cappelen, Oslo.
14
Glorious
Not everyone agrees on this view of the Revolution. See, for example, Sussman, N. and Y. Yafeh
(2004): "Constitutions and Commitments: Evidence on the Relation between Institutions and the Cost of
Capital", CEPR Discussion Paper 4404.
15
Smith, Adam (1776): An Inquiry into the Nature and Causes of the Wealth of Nations, Book I: Division of
Labour.
16
Sinclair, David (2001), The Pound. A Biography. The Story of the Currency That Ruled the World, London:
Arrow Books 2001 pp. 141-2.
his high turnover of wives. To coin collectors, on the other hand, he is associated with
theGreat Debasement, whereby the silver content of one coin after another was diluted.17
Neither the turnover among his wives nor the debasement of the coinage was conducive to
building confidence.
The King could solve a short-term financing problem by issuing debased coins and more
notes. However, with ever more coins and notes chasing the same goods, the long-term
consequence was rising prices. Economists refer to this as an inflation tax.18
What happens when the powers that be unleash inflation?
•
First, confidence in money as a store of value disappears. An extreme example is
the 1923 hyperinflation in Germany, when absolutely everything, including
perishable food products, provided better security than money.19
•
Second, money disappears as an accounting unit. Goods became the new
standard. During the Napoleonic Wars, inflation was also very high in Norway, and
the local history of the islands of Karlsøy and Helgøy shows that accounts were kept
in silver or goods such as cod liver oil, Pollock and flour rather than speciedalers.
•
Finally, money ceases to function as a means of exchange. After the Second World
War, German industrial workers were paid in the businesses' own products.
Cigarettes and nylons functioned as a general means of payment.20
I mentioned that the monetary system seems to be shrouded in a veil of mystique. Initially it
was not. A coin's value was equal to its weight in silver. In our day, the promise of precious
metal has been replaced by the central bank's promise of price stability. Underpinning this
promise is an institution, that is to say a bureau of statistics, which can measure general
price developments, generally by means of a consumer price index. The statistics bureau
must be independent of the political authorities, unlike in Argentina recently where the
director was replaced because the government did not like the price figures.21 Or unlike the
17
Between 1526 and 1542 the silver content of the circulation coin groat was reduced by 23.2 percent while the
coin retained its nominal value of four pence. The King's gross seigniorage increased from 2.1 to 20.1 percent.
Glassman, Debra and Redish, Angela (1988) "Currency depreciation in early modern England and France",
Explorations in Economic History, Vol. 25, Issue 1, pp. 75-97.
18
Normally, it is Parliament's responsibility to appropriate money and the Crown's prerogative to spend it. When
taxation occurs through inflation, this rule is broken.
19
One of the classic accounts of hyperinflation is provided by Fergusson, Adam, When Money dies. The
nightmare of the Weimar Hyper-Inflation, London: William Kimber & Co.
20
Owing to a lack of reliable means of payment, the recovery of production capacity and commerce in Germany
after the war came to a standstill. On Sunday, 20 June 1948, under the direction of Ludwig Erhard, a
largescale currency reform was carried out in the western zones of occupation. The introduction of the
Deutschmark was followed by measures to deregulate the economy and dismantle price controls. Virtually
overnight, goods were available in the shops again. In the wake of these reforms, the Bank deutscher Länder,
the precursor of the Bundesbank, was founded. The launch of the Deutschmark was an institutional
prerequisite for the beginning of the postwar German Wirtschaftswunder. The successful reform bolstered the
reputation of the monetary policy authorities and provided fertile soil for the trust the Bundesbank has enjoyed
as a defender of stable money up to the present day.
21
The events in Argentina in 2007 led to the initiation of a research project at the MIT Sloan School of
Management to collect price data from retailers on a daily basis using scraping technology. The project,
currently referred to as the Billion Prices Project (see http://bpp.mit.edu/) is primarily associated with the MIT
researchers Alberto Cavallo and Roberto Rigobon. The project started on a very small scale where in 2007.
Cavallo used the technology to collect price data from supermarkets across Argentina, and he showed that
inflation in Argentina was between twice and three times as high reported in the official figures.
Today, the project is being continued under the direction of the private company PriceStats, which provides
data collection and processing services. The Billion Prices Project currently involves the collection of price
information from more than 70 countries and daily inflation series are published for over 20 of them.
Fortunately, Argentina proved to be the only country where price indices using the new scraping technology
situation in Norway in the 1950s, when the government subsidised some goods in the index
to avoid automatic wage increases.22
The monetary system has also become more intricate along another dimension. Today, cash
accounts for only 5 percent of the money supply. Payments are primarily made using deposit
money, which involves electronic signals created by the banks themselves, via cards, mobile
phones or online payments.23 Millions of transactions between individuals, companies and
banks take place every day. These payments are settled at Norges Bank four times daily by
transferring money between banks' accounts in Norges Bank. Norges Bank does not
regulate the issuance of deposit money directly. By setting the interest rate on banks' sight
deposits with Norges Bank and by securing settlements between the banks, the central bank
is nevertheless the fundament of a vast and complex payment system.24
The central bank/Norges Bank
History has shown that monarchs are not always to be trusted to safeguard the monetary
system.25 An institutional solution is to delegate the task of issuing money to a central bank
and shield it from the authorities' temptation to focus on short-term interests.26
were systematically on a much higher level than the official inflation figures. Thus, it appears that in today's
open societies, it is difficult to conceal true developments. Incidentally, Argentine inflation figures from
PriceStats continue to show much higher inflation than the official figures (see http://www.pricestats.com/
argentina-series). From February 2012, The Economist has replaced the official inflation figures for Argentina
in its statistical tables with inflation figures compiled by PriceStats.
22
Index manipulation is a demanding enterprise that often resulted in perverse economic incentives, sometimes
with entertaining results. After 1945, a stabilisation strategy was one of the cornerstones of the Government's
economic policy, and prices were to be kept stable as a way of navigating through the economic cycle. In July
1948, the Ministry of Trade received an offer to purchase a consignment of part-skim Danish Gouda cheese, a
food item that was included in the cost-of-living index. Despite the bargain offer, the import price would have
been higher than the selling price, so that subsidies would be necessary to avoid impacting the index. The end
of the story was that a consignment of full-fat Gouda was imported, an item that was far more expensive, but
Ambisjon og Tradisjon. Finansdepartementet 1945-1965
that was not included in the index. Lie, Einar(1995):
[Ambition and Tradition]. The Ministry of Finance 1945-1965], Oslo: Universitetsforlaget, p. 121.
A few years ago, the news website TV 2 Nettavisen revealed that the large grocery chains adjusted the prices
of goods they knew were included in price tests conducted by the media in order to come out favourably in the
tests. For example, the price of hand soap in a pump dispenser is lower than the equivalent quantity in a refill
package: http://www.nettavisen.no/okonomi/privat/article373382.ece.
23
According to the economist Stephen Quinn, secure central bank money triggered a spate of financial sector
innovations. The central bank could offer notes with little risk regarding liquidity and public acceptance. On the
other hand, notes were costly to use - an example is the considerable interest payments forgone when large
amounts are held in cash. With the monetary system firmly anchored, private participants could offer more
cost-effective payment solutions: deposit accounts, giro transfers, clearing and cheques. This system rested
on confidence in central bank money. (Quinn, Stephen F., and William Roberds. 2005. "The Big Problem of
Large Bills, the Bank of Amsterdam and the Origins of Central Banking." Federal Reserve Bank of Atlanta
Working Paper 2005-16).
24
Large-value payments between banks are settled continuously in Norges Bank. See also Lerbak, Marie N.
(2013): "Om pengemengden" [On the money supply], Norges Bank Staff Memo no. 14.
25
A characteristic of money as a means of payment is its anonymous nature. Before the use of money became
common among ordinary people, payments usually took place in connection with commercial transactions,
whether for goods or services, via networks from which it might be difficult to extricate oneself. The farmer was
usually indebted to a town merchant, which resulted in dependency and an obligation to deliver a portion of his
produce. Labourers might receive partial payment for their efforts in kind, or at large mills, in scrip that could
only be used for purchases in the company store. The monetisation of the economy, based on secure
monetary values, severed many of these ties of dependency. With money in their pockets, accepted as legal
tender everywhere, the farmer or labourer was able to choose. This is also freedom. Nor did the party
receiving payment, e.g. the town merchants to know more about the customer than that he had money in his
pocket and could pay for the goods. Eitrheim, Ø. and L.F. Øksendal (forthcoming): On secure monetary values
and freedom.
In Norway, the aim of shielding the monetary system from the government was already
embodied in the Constitution of Norway adopted on 17 May 1814. The drafters of the
constitution formulated the following in Article 75(c): "It devolves upon the Storting ... to
supervise the monetary affairs of the Realm".
This provision strongly censured the Danish King's monetary policy during wartime. In future,
representatives appointed by citizens, not the Crown, were to have final responsibility for the
monetary system.27 The King's scope for taxation by means of inflation was curtailed.
The Storting, which was supposed to meet every third year, was not equipped to assume
day-to-day responsibility for the monetary system. "Someone" had to do this on behalf of the
Storting. That "someone" became Norges Bank, which was established in 1814. The Storting
realised that the objectives of monetary policy could be best achieved if the monetary system
was shielded from the arbitrary intervention of the monarchy. The distance between the seat
of government in Oslo and the central bank in Trondheim was a perhaps deliberate twelve
day journey.28
26
A central bank requires mechanisms that ensure confidence. Kydland and Prescott demonstrated that
policymakers who tried to pursue an optimal plan for economic policy may have a strong incentive to deviate
from the same plan at a later point in time. This will be the case, even in the absence of news that would
warrant a change in the plan (see Kydland F.E. and E.C. Prescott (1977), "Rules Rather Than Discretion: The
Inconsistency of Optimal Plans", Journal of Political Economy, Vol. 85, No. 3, pp. 473-491).
The expression "tying oneself to the mast" encapsulates in a simple way how the central bank can avoid the
dilemma that Kydland and Prescott describe. The traditional task of the central bank was to issue notes and
coins and ensure a well-functioning payment system. But the payment system is only well-functioning when
the public has confidence in the value of money. Thus, the primary duty of central banks is to ensure that the
value of money is stable. The value of money relies on the confidence of the public that a responsible policy is
being pursued. If a central bank is to keep its promise and deliver stable money, it is important that the political
authorities stand behind it. Otherwise the central bank will be unable to keep its promise.
Throughout history, central banks have tried various mechanisms for tying themselves to the mast. Being
accountable for their promises in the form reporting and follow-up is one mechanism that ensures that the
bank is tied to the mast. Relinquishing the opportunity to break a promise makes that promise more credible.
These are matters I touched on in my speech "On the topic of keeping promises" in 2008. Keeping a promise
is difficult, because reneging on a promise will often be the tempting or rational choice in the short-term. The
legal scholar 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. 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 (Michael Woodford,
2003: Interest and Prices, Princeton University Press). 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].
In the long term, a stable value of money is the only promise that the central bank has the means to deliver.
This promise was previously kept by regulating the supply of money issued. Today, the interest rate is the
instrument. The central bank does not manage real wages, the labour supply, employment or the level of
unemployment in the long run. But, if price-stability is firmly anchored, the central bank can help to reduce
short-term economic fluctuations. While central bank independence promotes price stability, researchers do
not find a discernible connection between central bank independence and real economic variables such as
GDP growth or unemployment (see Alesina, A. and L.H. Summers (1993), "Central Bank Independence and
Macroeconomic Performance: Some Comparative Evidence", Journal of Money, Credit and Banking, Vol. 25,
No. 2., pp. 151-162).
27
The principle whereby the new state would have its own monetary system, separate from Sweden, was written
into the November Constitution in the same year. Here the word "bank" is also used for the first time. In
keeping with the emerging liberal thinking of the time, keeping the value of money secure was considered
essential, a prerequisite for the liberty of the citizenry.
28
This journey time is f