years. on the basis of its analyses, norges bank does not find grounds for regarding this level as inappropriate. 9. how does the norwegian regime differ from inflation targeting? price stability is an important part of long - term exchange rate stability, and the setting of interest rates will often be the same whether the goal is exchange rate or inflation targeting. however, norwegian monetary policy differs in some respects from monetary policy in countries with an inflation target. • norway has a long tradition of cooperation between the political authorities and social partners. income and wage determination is fairly centralised, and the social partners evaluate the effects of wage outcomes on employment. • in a number of countries that have switched to a monetary policy regime based on inflation targeting, fiscal policy is oriented towards reducing government debt and deficits. a passive fiscal policy implies that in practice monetary policy assumes a greater role in stabilising the economy. in norway fiscal policy has an important role in demand management. the fulfilment of this task is facilitated by the fact that the norwegian government has greater financial leeway than most other countries due to its oil revenues. fiscal policy has been fairly well adapted to the economic situation over the last decade. the active role it has played in demand management has functioned as an anchor for fiscal discipline. the government petroleum fund is meant to be a buffer against changes in the terms of trade. in other countries this role must be filled by the exchange rate. chart 12 how does the norwegian regime differ from inflation targeting? • co - operation : – tradition of co - operation between political authorities and social partners – wage - setting considering employment effects • fiscal policy : – fiscal policy has financial leeway for stabilisation policy – petroleum fund buffer against terms of trade variability, not the exchange rate • monetary policy : – different formulation of target – different institutional setting legg inn filadresse her • monetary policy in norway is oriented towards stability of the exchange rate and not an explicit inflation target. the setting of interest rates will more or less be the same. norges bank focuses on keeping a low rate of inflation and on avoiding a situation in which monetary policy in itself contributes to a recession that may threaten the fundamental conditions for stability of the krone. • the institutional set - up for monetary policy in norway is different. in a country with inflation targeting, the central bank will inform the political authorities if the inflation target is not met. in norway, norges bank will inform the authorities that measures other than those available

exchange rate at all times. 34 however, the currency turbulence in the latter part of summer 1998 demonstrated that like other central banks, norges bank could not make good on the promise to maintain a stable exchange rate from hour to hour, day to day or week to week. domestic economic considerations indicated that there were limits to how high the interest rate could be set in support of the krone exchange rate. an excessively high interest rate would not have been credible since it would have resulted in an excessively sharp downswing in domestic economic activity. in august 1998, norges bank shifted policy to setting the interest rate with a view to keeping inflation low and stable over time. 35 the shift in monetary policy was explained in articles and statements in early winter 1999. 36 the inflation target was finally formalised in a new regulation on monetary policy in 2001, a good eleven years after new zealand, nine years after the united kingdom and eight years after sweden. the mandate for norges bank states that monetary policy shall, in addition to securing price stability, contribute to stabilising output and employment. it is possible to give weight to cyclical fluctuations in interest rate setting, and to new information, as long as there is confidence that inflation remains near the target. the central bank ’ s announced interest rate strategy ahead will be adjusted as new information emerges. this stands in contrast to the parity system, which was more rigid. the authorities cannot systematically allow policy to be more expansionary than announced to bring down unemployment. as kydland and prescott demonstrated, this would lead to another difference is that under parity policy the authorities stabilised the price of gold and not the price of a basket of representative goods – the consumer price index. today, stabilisation of the consumer price index would be described as price level targeting. inflation targeting, on the other hand, implies stabilisation of changes in the consumer price index. there is also a difference in that there is no longer any redemption obligation. confidence is not based on gold reserves, but more generally on responsible economic policy as a basis for achieving the inflation target through the active use of the interest rate. at that time, little academic research was available on alternatives to a fixed exchange rate regime or money supply targeting. leading politicians and economists were sceptical about the idea of abandoning the fixed exchange rate regime. money supply targeting was regarded as out of the question because of instability in the money supply. john taylor ’ s works on interest rate rules that