In the 1980s and 1990s, central banks in many countries are granted greater independence from the political authorities. This mitigates the time-inconsistency problem. Central banks can – and should – make unpopular decisions when necessary. Central banks are given the responsibility for ensuring low and stable inflation. An explicit numerical inflation target is introduced in more and more countries. The first one to do so was New Zealand in 1990. In Norway, the authorities continue to pursue a fixed exchange rate policy for a while, but in 2001, the Government introduces an inflation target in Norway.4 In the initial period of inflation targeting, central banks are concerned with building confidence in their targets. Many central banks practice inflation targeting fairly rigidly and seek to guide inflation back to target relatively quickly after a deviation. Once confidence is established that inflation will remain low and stable over time, central banks can give more weight to other considerations, such as promoting high and stable employment. Inflation targeting gradually becomes more flexible. Norway’s experience with inflation targeting is positive. In spite of a global financial crisis and large swings in oil prices, inflation remains low. Monetary policy is used actively to stabilise the economy. In the revised monetary policy mandate adopted in 2018, it is specified that monetary policy shall be forward looking and flexible. But monetary policy does not operate in a vacuum. An appropriate division of roles in economic policy is decisive. 3.

Hong Kong  Repayment criteria toughened, a risk weight floor of 15% for residential mortgages, LTV on car park spaces and commercial property  Action on car park spaces followed leakages of the house price exuberance into other sectors  New Zealand  Restriction of new high LTV lending to 10% of new loans  Singapore  Debt service ratio, reduced repayment periods, tightened LTV, increased land supply  Norway  Countercyclical capital buffer of 1% from July 2015  UK  Removed incentives for household lending in Funding for Lending scheme. FPC given ability to recommend changes to affordability criteria on mortgage lending. 8  Part of a series of measures. BIS central bankers’ speeches  References Aikman, D, Haldane AG and Nelson, B (2010) “Curbing the credit cycle”: http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2010/speech463. pdf. Aikman, D, Haldane AG and Nelson, B (2014 forthcoming) “Curbing the credit cycle”, The Economic Journal. Bank of England (2009), “The role of macroprudential policy”, Discussion Paper: http://www.bankofengland.co.uk/publications/Documents/other/financialstability/roleofmacrop rudentialpolicy091121.pdf. Bank of England (2011), “Instruments of macroprudential policy”, Discussion paper: http://www.bankofengland.co.uk/publications/Documents/events/ccbs_workshop2012/paper_ kapadia.pdf. BCBS (2010). Basel III: A global regulatory framework for more resilient banks and banking systems. Chari, VV and Kehoe P (2013), “Bailouts, time inconsistency and optimal regulation”, NBER working paper no. 19192. De Paoli, B and Paustian, M (2013), “Coordinating monetary and macroprudential policies”, Staff Reports 653, Federal Reserve Bank of New York. Goodfriend, M. (2007) “How the world achieved consensus on monetary policy”, Journal of Economic Perspectives, 21(4), pages 47–68. Haldane, A. G. (2013), “Why institutions matter (more than ever)”: http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech676.pdf.