was the yuppy period, unsound investments and a wage and price spiral that hit the entire economy. the norwegian economy had to go through an extensive turnaround operation in the late 1980s. confidence in monetary policy and the norwegian krone had to be restored in order to avoid persistently high inflation. it took a long time, and very high interest rates were required, before confidence in the nominal anchor was restored. 5. conclusion through a sound, credible orientation of monetary policy, it is possible to attain an inflation rate that on average is equal to the targeted figure. by practising flexible inflation targeting, i. e. having a mediumterm horizon for the inflation target, we can also achieve a reasonable trade - off between inflation variability and output variability in the short term. but monetary policy has no lasting effect on output and employment. these are determined by the supply of economic resources - capital and labour. technological developments, and our ability to use that technology, also play a decisive part. in the long run, monetary policy cannot influence output, employment or competitiveness beyond the benefits that follow from low and stable inflation. the economy requires a nominal anchor. the government has laid out a guideline for monetary policy which implies flexible inflation targeting. this is a regime that has also won broad international support. this bis review is available on the bis website at www. bis. org.

stable. it is also a necessary precondition for stability in financial and property markets. the regulation also states that monetary policy shall be aimed at stability in the international value of the krone. the krone exchange rate fluctuates from day to day, from week to week, and from month to month. we have free international trade and free capital movements. we do not have the instruments for fine - tuning the exchange rate. in norges bank ’ s submission of 27 march 2001 to the ministry of finance on the new guidelines for economic policy, we indicated that when monetary policy is aimed at low and stable inflation, this is the best contribution monetary policy can make to stability in the krone exchange rate over time. the interest rate affects price inflation through a number of channels, including the krone exchange rate. a stronger krone curbs inflation. if we take steps to counteract an appreciation of the krone when there are pressures in the economy, we reduce the possibility of keeping inflation at bay and there is a greater risk of pronounced fluctuations in the economy. maintaining stability in the internal value of the krone must thus take precedence. as long as other countries pursue a policy of low and stable inflation, stability in the international value of the krone is dependent on low and stable inflation in norway the implementation of monetary policy is delegated to norges bank. this implies that norges bank sets the interest rate on the basis of our understanding of the regulation, as indicated in the bank ’ s submission to the ministry of finance in march last year. our interpretation places emphasis on the government ’ s rationale behind the regulation, on the objective as formulated in the first paragraph and on our knowledge about the relationships between the interest rate, the krone exchange rate, output, employment and inflation. the operational objective of monetary policy is low and stable inflation. the inflation target is set at 2½ per cent. a monetary stance resulting in high and varying inflation would have led to wider swings in output and employment. it would also have been a recipe for turbulence in the foreign exchange markets. there is therefore a close link between the third paragraph of the regulation - the inflation target - and the first paragraph concerning stabilising economic developments and exchange rate expectations. monetary policy affects the economy with considerable and variable lags. the current level of inflation does not provide an adequate basis for determining the level at which interest rates should be set today. our analyses indicate that a substantial share of the effects of