As my newsagent told me the other day: “Don’t believe everything you read in the newspapers – they are all in the hands of the media.” The argument for including employment explicitly in the formal remit of the Monetary Policy Committee is often bolstered by reference to the objectives of the Federal Reserve in the United States, which is charged by statute with promoting “the goals of maximum employment, stable prices, and moderate long-term interest rates”. At first sight, this appears to contrast with the remit of the MPC which is: “(a) to maintain price stability and (b) subject to that to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment”. But what matters most is the intellectual framework underlying the behaviour of the central bank. The Federal Reserve’s remit does not make clear if the FOMC is supposed to try to exploit some long-term trade-off between employment and inflation. But the practice is clear. Under Alan Greenspan’s leadership, the FOMC has firmly rejected the notion that by accepting a somewhat higher rate of inflation it is possible to achieve a permanently higher level of employment. It is conventional to express the implications of a vertical long-term Phillips curve in terms of the statement that unemployment can be held below the natural rate only by accepting accelerating inflation – or, to be more precise, an inflation rate higher than anticipated by wage bargainers. Equally, however, the statement can be turned the other way round.

Imposing capital requirements always involves a trade-off between financial stability concerns and efficient capital allocation. In a downturn, when concern about the availability of credit may be greater than in an upturn, a temporarily reduced capital requirement may be justified. The condition must be that the buffer is built up again during the upturn. Such time variant capital requirements would also be demanding to implement, however. It would leave the relevant authority with the discretion to assess the cyclical situation and impose appropriate capital requirements. The time horizon over which the economic outlook should be assessed would have to be several years, in order to cover the full cycle. As for ways to make the economy – in Norway and in a number of other countries – more robust to asset price fluctuations, I think household incentives to borrow and invest in residential property should be reduced. Tax deduction of interest against income, combined with too low or non-existing property taxes, contribute to a high leverage ratio. Earlier, I spelled out some challenges involved in implementing macro-prudential policy measures. I did not mention the important international aspects of these issues. First, given banks’ cross-border activities, it is of particular importance to establish a level playing field and avoid competition among regulatory authorities. Lax regulation in one area would undermine everybody’s efforts to reduce systemic risk. Second, in order for the economy to benefit from attempts to make the effect of regulations less pro-cyclical, discretionary elements of the system would have to be coordinated across borders.