’ s conduct of monetary policy is oriented towards low and stable inflation. the operational target of monetary policy is annual consumer price inflation of close to 2. 5 percent over time. at the same time, monetary policy shall contribute to stabilising developments in output and employment. since the introduction of the inflation target in 2001, annual consumer price inflation has averaged 1. 8 percent, which is somewhat below, but close to, 2. 5 percent. in norges bank ’ s assessment, consumer price developments since 2001 have been well within the flexibility provided for under the monetary policy mandate. the monetary policy response pattern can be summarised in three criteria for an appropriate interest rate path. the first criterion states that the interest rate should be set with a view to stabilising inflation at target or bringing it back to target after a deviation has occurred. the specific time horizon for stabilising inflation at target will depend on the disturbances to which the economy is exposed and their duration. the second criterion states that the interest rate path should provide a reasonable balance between the path for inflation and the path for overall capacity utilisation in the economy, i. e. that the inflation targeting regime is flexible. flexible inflation targeting builds a bridge between the long - term objective of monetary policy, which is to provide an anchor for expectations of low and stable inflation, and the objective of stability in the economy. the third criterion states that monetary policy should be robust and should seek to mitigate the risk of a build - up of financial imbalances. the criterion is an expression of the lack of a complete understanding of how the economy functions or the shocks to which the economy may be exposed. the consideration of robustness can therefore be interpreted as a form of insurance against adverse outcomes. norges bank does not have independent objectives for asset price inflation or debt growth. however, by mitigating the risk of financial imbalances, we may also achieve more stable developments in inflation, output and employment over time. in the case of conflicting objectives, the choice of interest rate path will involve a trade - off between different considerations. bis central bankers ’ speeches if monetary policy only took into account the low level of inflation, the key policy rate would be rapidly reduced and kept close to zero for a good while. inflation might then pick up faster, partly as a result of a weaker krone. in the light of the trade - off against other considerations, however, the bank does not want to accelerate the pace of inflation

percent of gdp is often a harbinger of future problems. spain is a case in point : government finances were fairly healthy, but deficits were building up in the private sector. inflation of more than 4 percent is usually a sign of economic instability. if unemployment in a country is persistently above 4 percent, there is probably something wrong both with the functioning of the labour market and with the level of political ambition. and the financial crisis has shown that total banking sector lending in the most heavily indebted countries has often been more than 4 times gdp. 18 in this situation, any rescue packages would be too expensive for taxpayers – ireland and iceland are two examples. this is a familiar element in our everyday lives. speed limits are an example of such a rule. calculating the optimal speed for a specific car on a specific road is extremely complicated. it would require considerable knowledge of both mechanics and physics. speed limits help us. of course, it might be optimal to drive faster or slower than the speed limit, but the rule is simple to understand and easy to enforce. this simple rule helps to shape our behavioural patterns to ensure efficiency and safety in the traffic system. simple rules can also make it easier to resist the temptation to postpone problems. economists call this the time inconsistency problem. odysseus solved his time inconsistency problem by having himself tied to the mast and instructing his crew to plug their ears with wax and ignore him when he would later ask them to steer the ship towards the song of the sirens. that was an easy rule for the crew to follow. but rules can be too simple. 19 they must be used only as points of reference, not as excuses for doing nothing. economic policy rules should be common knowledge. an independent body should be established to tell us when we are “ speeding ”, and procedures must be in place to implement measures to solve the problem. 20 the new " fiscal compact " in the euro see berg, qvigstad and vonen ( 2011 ) two essays on the magic number 4, staff memo 2 / 2011, norges bank, and llewellyn and qvigstad ( 2012 ) the “ rule of four ”, the business economist, vol 43, no. 1. the financial sector faces risk involving probabilities of various outcomes that we can forecast fairly accurately. but it also faces genuine uncertainty, where probabilities are also unknown. we do not know all the possible outcomes