For example, the Reserve Bank of New Zealand will in an extraordinary situation with a very sharp rise in asset prices consider extending the horizon for achieving the inflation target in order to dampen developments in asset prices. The purpose of this is to reduce the risk of a serious economic downturn at a later time. In Norway, we have flexible inflation targeting. We have chosen to incorporate assessments of financial stability in the interest rate decisions. This is primarily because developments in financial balances affect inflation and output over time. Through its work on financial stability, Norges Bank gathers information about the financial strength of the financial system and the financial position of households and the corporate sector. This information is useful in connection with monetary policy decisions. Integrating the objective of financial stability into monetary policy ensures that we are giving adequate attention to risks in the financial system. But it is important to remember that we have only one monetary policy instrument, the interest rate. Monetary policy should continue to focus on price stability. In the light of the experiences of different countries in the last 10-15 years, I am confident that flexible inflation targeting provides us with a sound framework for performing this task. 11 “Asset price ‘bubbles’ and monetary policy”. Remarks before the New York Chapter of the National Association of Business Economics, New York, 15 October. 12 Issing, Otmar (2003), “Monetary and Financial Stability: Is there a Trade-off?” Speech at the conference “Monetary stability, financial stability and the business cycle”.

In the academic literature, some have suggested that the central bank can increase economic stability or reduce the negative effects of slow price adjustment by stabilising an index with fewer prices and weights other than those in the consumer price index.3 Prices that adjust slowly should have a relatively higher weight than prices that change quickly. Prices for goods and services where labour costs are a major component often adjust slowly.4 Labour costs are very important in these indices not only because they change slowly but also because they react to cyclical movements and are seldom exposed to extraordinary disturbances. 3  See Aoki, Kosuke (2001), “Optimal Monetary Policy Responses to Relative Price Changes,” Journal of Monetary Economics, Vol. 48, pp. 55-80, Arrazola Maria and José de Hevia (2002), “An Alternative Measure of Core Inflation,” Economics letters, Vol. 75, pp. 69-73, Mankiw, Gregory and Ricardo Reis (2003),“What Measure of Inflation Should a Central Bank Target?” Journal of the European Economic Association, Vol. 1, pp. 1058-1086, and Woodford, Michael (2003), Interest & Prices – Foundations of a Theory of Monetary Policy, Princeton University Press. 4  Angeloni, Ignazio, Luc Aucremanne, Michael Ehrmann, Jordi Gali, Andy Levin and Frank Smets (2004), “Inflation Persistence in the Euro Area: Preliminary Summary of Findings”, presented at the ECB’s conference on inflation persistence in the euro area, Frankfurt am Main , 10-11 December 2004. BIS Review 43/2005  3  Another topic currently of interest to academic research is whether a price level target may be better than an inflation target.