The second pillar of the Eurosystem’s strategy therefore consists of a broadly based assessment of the outlook for price developments and the risks to price stability in the euro area as a whole. This broadly based assessment takes into account, inter alia, the information provided by wage developments, exchange rates, fiscal indicators, real economic activity, and asset and commodity prices. Forecasts of economic activity and prices in the euro area can certainly also contribute to the success of an appropriately forwardlooking monetary policy. Thus we take into account forecasts available from international organisations such as the IMF and the OECD as well as internal forecasts. 3  BIS Review 60/1999  We are aware that forecasts have to be interpreted with great caution. Given behavioural, institutional and structural uncertainties, forecasting price and other developments in the euro area is inevitably difficult. Moreover, a forecast cannot encompass all the indicator variables that are important for monetary policy. Nor can it always incorporate indicators in a timely manner. Furthermore, by the time the forecast has been finalised, the original assumptions may have become less realistic, requiring a careful interpretation of the results. Therefore, a thorough analysis of individual indicator variables plays an important role in our monetary policy strategy, in addition to any role that these variables may have in the forecast. Within the stability-oriented monetary policy strategy, the Eurosystem also takes into account the external value of the euro as an important determinant of the outlook for price stability.

•  The central government budget – growth in public spending – influences the krone and the size of the internationally exposed business sector in the medium term. Government expenditure and revenues must be in balance in the long term. •  Wage formation, the structure of the economy and incentives determine how efficiently we use our labour resources and other economic resources. There is also an interaction: •  In its budget resolutions, the government authorities will attach importance to the effects of the budget on the Norwegian economy and will therefore take account of interest rate effects. In this way, they avoid a situation where growth in public spending and the interest rate push the economy in different directions. •  With a known monetary policy response pattern, the social partners 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 pay increases are, the fewer people can be paid over government budgets. The interaction here came into clear evidence when employment in the general government sector fell after the expensive wage settlement in 2002. The authorities can achieve better economic policy results if they can commit in advance to a set of credible policy rules. Households, enterprises and capital markets are forward-looking in their decision-making. It is therefore important that the authorities do not create doubt, but on the contrary act in a long-term and predictable manner. There must be consistency between plans and actions.