When the economy is exposed to shocks, the central bank can respond rapidly by adjusting the key policy rate, as we did in 2008 and when oil prices fell in 2014. A flexible inflation targeting regime can reduce the risk of unemployment becoming entrenched at a high level following economic contractions. Nevertheless, monetary policy cannot assume primary responsibility for high output and employment. The level of output and employment over time depends on overall economic policy, including the tax and social security system, the wage formation process and the functioning of the labour market. Monetary policy is only one component of such an overall framework. 2/4  BIS central bankers' speeches  The importance of financial markets and financial stability was underestimated before the crisis – also by central banks. The financial crisis revealed how harmful financial imbalances can be. Monetary policy can in given situations take account of the risk of a build-up of financial imbalances. But monetary policy cannot take primary responsibility for heading off a gathering storm. Regulation and supervision of financial institutions are the primary means of addressing shocks to the financial system. The build-up of financial imbalances has in recent years been given little weight in monetary policy among the major central banks. Their focus has been on counteracting a deeper and more prolonged downturn and on preventing deflation. In countries that were less affected by the financial crisis, more attention has been devoted to financial stability considerations. In high-tech, global financial markets, capital moves rapidly between different currencies.

Ten years of historically low interest rates and large-scale asset purchases give cause for reflection. An important question is what responsibilities should rest with a central bank. A related theme is what is meant by the objective of low and stable inflation. Chart: Inflation in Norway The primary objective of monetary policy is to maintain monetary stability, as part of the central bank’s responsibility for the monetary system. Inflation that is either too high or too low has undesired consequences, such as arbitrary wealth redistribution, underinvestment and resource misallocations. The result is lower activity and lower welfare. Since 1990, an increasing number of countries have chosen to link monetary stability to a numerical inflation target. Since the financial crisis, all of these countries have maintained their inflation targeting regimes. This reflects the overall positive experience with this framework. It did not get in the way of a powerful response to the financial crisis. In Norway too, inflation targeting has functioned well. Inflation has remained low and stable since it came down in the early 1990s, and the inflation target has anchored inflation expectations. During the period of inflation targeting, the Norwegian economy has been exposed to major shocks. A flexible inflation targeting regime has helped dampen their impact on output and employment. Employment variability has been lower since 2001 than in previous periods. 1/4  BIS central bankers' speeches  Lessons have been learned along the way. Initially, central banks had high ambitions to steer inflation to target within a clearly defined time horizon.