“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.

At that time, the  10  See Christiansen, Anne Berit and Jan F. Qvigstad (ed.) (1997): Choosing a Monetary Policy Target. Scandinavian University Press, Oslo. 11  See Crow, John (2002): Making Money. An Insider’s Perspective on Finance, Politics, and Canada’s Central Bank. Wiley, Canada. BIS Review 36/2004  5  concept was inspired by the work of Knut Wicksell 30 years earlier. As early as in 1898, Wicksell argued that price stability should be the central bank’s objective.12 After the collapse of the ERM in 1992, a gradual shift towards today’s system began in the UK, which translated into Chancellor Gordon Brown’s decision to transfer the authority to set interest rates from the Chancellor to a monetary policy committee at the Bank of England in 1997. Inflation targeting is now the norm in small and medium-sized open economies. Denmark is an important exception. Since the mid-1980s, Denmark has conducted a very disciplined fiscal and wage policy. Combined with ERM II membership, this has enabled Denmark to maintain a credible and successful fixed exchange rate regime. The new monetary policy system that has gained international support has essentially been developed in concert by finance ministries and central banks, and through experience and practical application. Inflation targeting is not a static system, but a system that is challenged by both reality and academia. Subsequent economic literature has followed up where Knut Wicksell left off, and partly supports and partly questions central bank policy.