banks ’ challenges in the interwar period. later, governor aziz will address current challenges for central banks in emerging market economies. after lunch philip turner from bis and governor ingves will share some of their insights from the theory and practice of central banking. the day will conclude with a panel discussion chaired by professor gerlach, on central banks ’ future challenges. we are fortunate to have such prominent speakers here with us today. i hope they inspire our further research on the topic “ what is a useful central bank? ”. walter bagehot ( 1873 ) : “ lombard street : a description of the money market ”.

as a minimum, an economic model to be used as support for interest rate decisions should be based on the assumption that monetary policy can steer inflation. economic agents can be expected to look ahead when making consumption and investment decisions. it is not only current economic policy that is likely to matter to them, but also what they expect it will be in the future. expectations must therefore be incorporated and play a role in a monetary policy model. bis central bankers ’ speeches many economists previously held the view that unemployment could be reduced by accepting slightly higher inflation over time. monetary policy was oriented accordingly and inflation accelerated in many countries, without a sustained decline in unemployment. it turned out that bringing rising inflation under control involved substantial real economic costs. in the past 20 years, inflation has been consistently low and stable. economic growth has been just as high, if not higher, since inflation came down to a low level, compared with the years when inflation was high and at times at double - digit levels. for the model to be relevant it should build on long - term relationships that we believe to be valid and it should be consistent with data. for example, the model ’ s relationships should describe how the interest rate works, in line with relevant empirical observations of the norwegian economy. it is also of considerable importance to us that the economic mechanisms in the model should be understandable and easy to communicate. the model apparatus is to function as a useful tool, both in the internal process ahead of the monetary policy meetings and in norges bank ’ s external communication. bis central bankers ’ speeches a model will never be able to provide an exhaustive description of reality. in 1979, the british statistician george box stated : “ essentially, all models are wrong, but some are useful ”. models can help to identify key driving forces and ensure a valid line of reasoning and consistency over time. this will enable the model to play an important role in the analytical basis for interest rate setting. at the same time, we must use common sense and experience when evaluating the model - based results and supplement these results with our own professional judgement. in this respect, the bank has a pragmatic attitude regarding the use of models. before i discuss norges bank ’ s suite of models in greater detail, i would like to look at a few key macroeconomic variables and their interaction. studying fundamental statistical relationships provides important insight into the functioning of the economy. along with the theoretical foundation, such insight is one of the most important building blocks