for the norwegian economy. if developments are broadly in line with expectations, economic agents can expect that the interest rate will be set in line with that projected by norges bank. if conditions change, as was the case in august, norges bank will naturally adapt the monetary policy stance in the light of new economic prospects. through our communication and the reports we publish, it is possible for an external observer to anticipate this reaction with a fair degree of accuracy. my impression is that economic agents and analysts are generally fairly close to the mark in their analyses when they attempt to predict the interest rate level. chart : summary bis central bankers ’ speeches when the inflation target was introduced, norges bank stated that it would place particular emphasis on stabilising inflation in the initial years. as inflation became more firmly anchored, there was broader scope for giving more weight to stabilising output and employment. in addition, we now have ten years of experience and insight. compared with the first years, inflation targeting is now more flexible. when haavelmo received the nobel prize, he reminded us that economic policy can be demanding. a failure to react to the build - up of imbalances undermines confidence in economic policy. if we tighten policy to rein in imbalances – and succeed – we are viewed in retrospect as having been unduly pessimistic. there is, though, reason for a certain degree of optimism. theoretically anchored models and improved methods for quantifying them empirically provide a better basis for conducting an effective economic policy. moreover, we use professional judgement, which we take on board when we apply and further develop models and the analytical apparatus in norges bank. knowledge about relationships in the norwegian economy, in conjunction with professional judgement, provides a good platform. thank you for your attention. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches

to other economic theory. for example, economic growth over time will be determined by technological developments and the supply of labour and capital, and there will likely be a relationship between the real interest rate and potential growth. when we set the interest rate, we give weight to the current situation and the outlook two to three years ahead. the statistical models help us understand the current situation, while the equilibrium properties frame the analysis. nemo describes how the interest rate can be set to bring the economy from its current starting point back to the long - term equilibrium path. as a support tool in making monetary policy decisions, such a model apparatus is thus particularly relevant. i will come back to the main features of nemo later. chart : monetary policy model requirements norges bank operates under a formal monetary policy mandate. the bank ’ s objective is to stabilise inflation and provide the economy with a nominal anchor. 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. furthermore, the functioning of monetary policy should be in line with theory and experience. for example, norway ’ s recent history tells us that there is little likelihood that monetary policy will be able to influence the economy ’ s long - term growth potential. chart : growth and inflation many economists previously argued that unemployment could be reduced by accepting slightly higher inflation over time. monetary policy was oriented accordingly and inflation factor models, indicator models and var models. for a detailed discussion, see aastveit, k. a, k. gerdrup, a. s. jore ( 2011 ) “ short - term forecasting of gdp and inflation in real time : norges bank ’ s system for averaging models ”, staff memo 9 / 2011, norges bank. bis central bankers ’ speeches 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