this respect. the fiscal rule provides a good framework for tightening the stance when the economic cycle turns. fiscal policy in norway is conducted with the knowledge of how monetary policy will react. today ’ s flexible inflation targeting provides a monetary policy framework and guidelines as to how monetary policy is to be conducted in different situations. the fiscal authorities can internalise the monetary policy response pattern. it is also natural for them to do so as the government and the storting ( norwegian parliament ) have laid down the mandate for monetary policy. when the monetary policy response pattern is known and is consistent over time, the social partners can factor in a monetary policy reaction when setting wages. this viewpoint is most relevant when wage formation is centralised. when wage formation is decentralised, monetary policy will instead influence wage growth via market mechanisms, by stabilising aggregate demand. the existing monetary policy guidelines will function effectively whether wage bargaining is at a centralised, local or individual level. there is a fine balance in the division of roles between fiscal policy, wage formation and monetary policy. this balance will be disturbed if the objective of monetary policy is changed or broadened. should monetary policy give particular weight to asset prices? house prices in norway have risen sharply and probably excessively. the level of house prices in trondheim in central norway was an eye - opener for the american nobel laureate georg akerlof, who happens to be of swedish ancestry. at a family gathering, he was told that a distant relative had bought a house in trondheim at a price equivalent to more than usd 1 million, providing a source of inspiration for his and robert schiller ’ s book “ animal spirits : how human psychology drives the economy, and why it matters for global capitalism ”. 5 oecd interim economic outlook, ( march ) 2009. georg akerlof and robert shiller ( 2009 ) : “ animal spirits : how human psychology drives the economy, and why it matters for global capitalism ”, princeton university press. self - reinforcing mechanisms in financial markets, which lead to slower credit flows and falling asset prices in downturns and the inverse in upturns, pose a challenge to monetary policy. 6 we must take account of developments in equity prices and property prices when projecting inflation and output. norges bank ’ s interest rate setting does not rely solely on one simple rule, such as the taylor rule. 7 instead, we seek to take account of all factors that influence inflation and output in the medium term

) : “ formuespriser – konsekvenser for pengepolitikken? ( asset prices – consequences for monetary policy? ) ”, penger og kreditt no 4. see for example imf ( 2009 ), [ october ] world economic outlook, chap. 3, and lars svensson ( 2009 ) : “ flexible inflation targeting : lessons from the financial crisis ”, speech at a conference arranged by de nederlandsche bank in amsterdam, 21 september 2009. we also cross - check using simple monetary policy rules, cf. norges bank ’ s monetary policy report. olivier blanchard, chief economist at the imf, refers to this phenomenon when he states that the most effective instrument in relation to credit growth that amplifies swings in the economy is better regulation. see imf ( 2009 ) : “ lessons of the global crisis for macroeconomic policy ”. see for example white ( 2009 ) : “ should monetary policy ‘ lean or clean? ’, working paper nr. 34, federal reserve bank of dallas. should central banks also set explicit targets for asset prices? in our judgement, the answer is no, but we should probably apply a fairly long horizon for achieving the target so that we seek to take account of any imbalances that might disturb activity and inflation further ahead. the interest rate should be set so that developments in inflation and output become acceptable also under alternative, albeit not unrealistic, assumptions concerning economic developments and the functioning of the economy. norges bank ’ s mandate states that monetary policy shall be aimed at stability in the norwegian krone's internal and external value. the internal value of the krone is determined by inflation. our interpretation of the mandate is that the external value of the krone – the exchange rate – cannot be fine - tuned. however, low inflation also makes a contribution to exchange rate stability. the ministry of finance has not suggested, and norges bank has not requested, that house prices should be given particular weight. macroprudential supervision and systemic risk even though inflation targeting has served us well, it was not possible to shield norway ’ s small, open economy, in an environment of free capital markets, from the liquidity crisis in global financial markets last autumn. as we have observed abroad, when many banks encounter liquidity problems at the same time, triggered by a deterioration in some banks ’ financial strength, solvency problems can easily spread to other banks and to other countries. 11 this can