jarle bergo : monetary policy and business cycles speech by mr jarle bergo, deputy governor of norges bank ( central bank of norway ), at kunnskapsparken bodø, 25 september 2003. the text below may differ slightly from the actual presentation. the address is based on the assessments presented at norges bank ’ s press conference following the executive board ’ s monetary policy meeting on 17 september and on previous speeches. the charts in pdf can also be found on the website of the norges bank. * * * the operational target of monetary policy as defined by the government is inflation of close to 2. 5 per cent over time. the inflation target provides economic agents with an anchor for their decisions concerning saving, investment, budgets and wages. the inflation target also provides a framework for monetary policy ’ s contribution to stabilising output and employment. this intention is also expressed in the regulation on monetary policy. high demand for goods and services and labour shortages normally point to higher inflation. when interest rates are increased, demand falls and inflation is kept at bay. when demand is low and unemployment rises, inflation will tend to slow. interest rates will then be reduced. norges bank sets the interest rate so that future inflation will be equal to the inflation target of 2½ per cent. the interest rate has been reduced since december last year in response to the change in the inflation outlook. this was the result of weaker cyclical developments in the world economy and a sharp drop in interest rates internationally. in addition, the norwegian business sector has felt the effects of the high norwegian cost level and the strong krone exchange rate. public agencies have also had to adapt activities as a result of last year ’ s wage settlement. the weak prospects abroad and at home have in turn had an impact on the norwegian labour market and the outlook for wage growth and inflation in the years ahead. the mandate implies that the interest rate must be adapted to the outlook for the norwegian economy. if it appears that inflation will be higher than 2½ per cent with an unchanged interest rate, the interest rate will be increased. if it appears that inflation will be lower than 2½ per cent with an unchanged interest rate, the interest rate will be reduced. normally, this orientation of monetary policy will also contribute to stabilising output and employment. the impact of monetary policy occurs with a lag. the current inflation rate does not provide sufficient information to determine the level at which interest rates should be set now.

of the fall of the iron curtain. we recall from those times the russian word glasnost, which means openness. mikhail gorbachev sought to modernise the soviet union and used glasnost as a means of reducing corruption and abuse of power. in western democracies, the term glasnost took on a broader meaning, and was associated with detente between east and west in the 1980s. 11 as mentioned, the shift towards a more decentralised economy both in norway and abroad reflected the failure of centralised planning. monetary policy is an important component of the economic policy framework. 12 in my lecture here last year, 13 i noted that it can be demanding for the political authorities to ensure price stability because low interest rates are often more popular than high interest rates. an appropriate interest rate may therefore be demanding to see nou ( official norwegian report ) 1973 : 36 om prisproblemene ( on price problems ). for an account of economic policy in norway in the twentieth century, see tore jørgen hanisch, espen søilen and gunhild j. ecklund ( 1999 ) : norsk økonomisk politikk i det 20. arhundre. verdivalg i en apen økonomi ( economic policy in norway in the 20th century. ethics in an open economy ), høyskoleforlaget. see i. e., chapter 5 in the norwegian act on securities trading. in norway, the concept is also associated with jahn teigen ’ s contribution “ glasnost ” in the national final of the eurovision song contest 1988. during the financial crisis last winter the government wrote : “ monetary policy is the first line of defence in countering a setback in the economy ”. see report no. 37 ( 2008 - 09 ) to the storting ( norwegian parliament ) “ om endringer i statsbudsjettet 2009 med tiltak for arbeid ( on changes in the 2009 budget and labour measures ), ministry of finance, p. 6. the lecture entitled “ on keeping promises ”, remarks by endre stavang and henrik syse and francis sejersted ’ s summary of the debate have been published in nytt norsk tidsskrift 1 / 2009. set in government corridors. 14 most government authorities in democratic countries have solved this problem by delegating interest rate setting to an independent central bank. but