øystein olsen : the role of monetary policy revisited – welcome address welcome address by mr øystein olsen, governor of norges bank ( central bank of norway ), at the norges bank conference “ the role of monetary policy revisited ”, oslo, 26 september 2013. * * * it is a great honour and pleasure for me to welcome you all to this norges bank conference : the role of monetary policy revisited. in his famous 1967 presidential address before the american economic association, milton friedman set out to answer three interrelated questions. what should be the role of monetary policy? what can it contribute to achieving the major goals of economic policy? and how should it be conducted to contribute the most? five years after the onset of the global financial crisis, these questions are yet again at the forefront of our minds. the crisis and subsequent recession have presented substantial challenges to monetary policy. central banks have responded with great activism and have resorted to unconventional policies such as quantitative easing and an increasing use of forward guidance. and the crisis has led to a review of monetary policy frameworks. successful as monetary policy has been in safeguarding low and stable inflation, many argue that it should take risks to financial stability into account. moreover, a new set of macroprudential policy tools has been proposed to address systemic risks in financial markets directly. in norway, inflation targeting was introduced in 2001. since 2005, we have published a projection of the future path of our key policy rate. this path reflects our view on the role of monetary policy. we consider an interest rate path to be appropriate when it meets three criteria. first, the interest rate should be set with a view to stabilising inflation at our 2. 5 percent target. second, the interest rate path should provide a reasonable balance between the path for inflation and the path for overall capacity utilisation. this implies that inflation targeting is flexible. notwithstanding new macroprudential tools, we see a need to add a third criterion : the interest rate should be set so that monetary policy leans against a build - up of financial imbalances. at norges bank, we remain firmly committed to our flexible inflation targeting framework. but the global financial crisis has taught us to be both modest and inquisitive. experience with new macroprudential policy tools is limited, and institutional frameworks are still in the making. leaning against financial winds remains subject to debate. it is therefore important that we actively seek knowledge. it is

be deployed judiciously, within a regulatory framework, which rbi has suggested. guarantees increase government ’ s contingent liabilities, and add to risk premia for its own borrowing. guarantees per se at the end of the day have limited utility in solving important sector issues. for example, for small scale enterprises, perhaps non - pecuniary and transaction costs related to clearances, inspections and the taxation bureaucracy are more important. 12. second, since 2013, the central government has successfully embarked on a fiscal consolidation path. even then, our general government deficit ( that is borrowing by the centre and states combined ) is, according to imf data, amongst the highest in the group of g - 20 countries. in conjunction, the level of our general government debt as a ratio to gdp is cited by some as coming in the way of a credit rating upgrade. we have to take cognisance of these comparisons and facts as we go forward to make progress. specifically, this will help us to better manage risks for ourselves, and thereby mitigate financial volatility. in the context of an already adverse external environment that i mentioned earlier, this assumes more importance. 13. borrowing even more and pre - empting resources from future generations by governments cannot be a short cut to long - lasting higher growth. instead, structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the indian growth front. investment in public transport, specifically railways and urban mrts can lead to reduced costs and productivity gains as also help us to lower our oil import bill, and, as collateral benefit, improve air quality in our cities. 14. third, the continuing support towards recapitalisation of public sector banks. a wellcapitalised domestic banking system enhances the comfort of the various stakeholders to conduct business in the offshore ifsc as well. it is therefore critical that efforts towards developing an attractive offshore financial centre should also include measures for adequate provision of capital to the domestic banking system. we have to ensure that our banks continue to conform to international capital standards as a member of the g - 20 and the bcbs. let me turn to ifsc - related sector issues. c. micro ecosystem 15. the other dimension that is critical to gift ’ s comparative competitiveness is, as i mentioned 2 / 3 bis central bankers'speeches earlier, the micro ecosystem within the ifsc. here, there is the need for a modern complementary legal infrastructure. we need to do