The insights gained from these studies provide arguments in favour of ensuring the independence of the central bank vis-à-vis the political authorities, and of defining binding monetary policy objectives. Former governor of Norges Bank Hermod Skånland was particularly interested in this issue. Skånland stated the following as early as 1979:7 “What the central bank can do, on the other hand, is to use its professional judgment to conduct a policy for demand management, which is in line with the more long-term objectives and guiding principles that have been drawn up by the political authorities. This presupposes, however, that the central bank also has the possibility of objecting to requests from the same authorities when their efforts to solve more short-term problems bring them into conflict with more long-term objectives.” – The other lesson drawn from the experience of the 1970s and 1980s was that it was not possible to reduce unemployment in the medium and long term by merely accepting somwhat higher inflation. Faced with the question of whether an increase in inflation from say 10 to 12 per cent was acceptable if stimulating the economy could at the same time reduce unemployment from say 2 to 1½ per cent, the decision-making authorities would most likely have been inclined to answer yes. But experience showed that this was not an available option. An attempt to increase output beyond the level that is consistent with stable inflation will over time lead to steadily rising inflation. Economic agents will eventually incorporate higher inflation into their inflation expectations.

“This will yield a solution in the form of an optimal path for economic and social development.” Professor Lars Svensson, one of the most prominent contemporary academics in the field of monetary policy, expresses thoughts similar to those of Frisch. Svensson recommends the following:14 “...inflation targeting central banks should announce (an) explicit loss function with numerical weights on output-gap stabilization... Simple voting procedures for forming the Monetary Policy Committee’s aggregate loss function... are suggested.” A practical approach, which is probably pursued by most central banks, is to produce projections for the economy based on different, possible interest rate paths. Decision-makers can then strike a balance between the various considerations and make decisions based on these projections.15  12  See Berg, Clas and Lars Jonung (1998): “Pioneering Price Level Targeting: the Swedish Experience 1931-37”. Conference on Monetary Policy Rules, Stockholm, 12-13 June 1998. 13  Frisch, Ragnar (1971): “Samarbeid mellom politikere og økonometrikere om formuleringen av politiske preferanser” (Cooperation between politicians and econometricians on the formulation of policy preferences). Sosialøkonomen No. 6, 1971. 14  Cf. Svensson, Lars (2003): “The Inflation Forecast and the Loss Function” in Paul Mizen (ed. ), Central Banking, Monetary Theory and Practice: Essays in Honour of Charles Goodhart, Edward Elgar. 15  For a description of principles for inflation targeting, see Lars Svensson’s presentation “What is inflation targeting?” on Norges Bank’s website: www.norges-bank.no/english/monetary_policy/workshops/2004/program-03.html.