( 1998 ). see gjedrem ” challenges in monetary policy ”, aftenposten, 4 may 1999. inflation has been low and stable since the mid - 1990s because the objective of monetary policy has been to provide the economy with a nominal anchor. economic agents should be able to rely on the value of money remaining stable over time. high inflation and inflation that varies considerably over time result in random changes in the real value of assets and debt. this leads to unintended transfers between creditors and debtors. when inflation is high and variable over time, the function of prices as an information vehicle is also impaired. when inflation is low and stable, changes in relative prices are more easily discernible, and it is easier for households and businesses to make decisions about consumption and investment. low and stable inflation is the best contribution monetary policy can make over time to employment, economic growth and welfare. the central banks in the first industrialised countries have attained a more independent status over the past 20 years. this is partly because germany and its firm bundesbank fared better during the period of high inflation in the 1970s and 1980s than many other countries. arguments in favour of an independent central bank are also found in economic theory. studies by finn kydland of norway and edward prescott of the us at the end of the 1970s on economic policy rules were groundbreaking. 10 the insights gained from these studies provide arguments for ensuring central bank independence and deriving monetary policy objectives. history and theoretical studies have taught us that adverse effects may occur if the authorities do not take into account that households and enterprises are forward - looking when making decisions about consumption, investment, wages and prices. they base these decisions their expectations of economic policy in the future, not only on today ’ s policy. it is therefore important that the authorities do not sow doubt, but on the contrary pursue a longterm and predictable policy. the authorities must be credible and inspire confidence. there must be consistency between the stated objectives of economic policy and what is actually done to achieve these objectives. this is the most important reason why the conduct of monetary policy has been delegated to the central bank in norway, as is the case in other comparable countries. the question of central bank independence is not new. when norges bank was established almost 200 years ago, there was much discussion about where to locate the head office. trondheim was chosen and one of the arguments in the debate was that locating the central bank far from the seat of

svein gjedrem : economic perspectives address by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the meeting of the supervisory council of norges bank, oslo, 14 thursday 2008. please note that the text below may differ slightly from the actual presentation. * * * introduction henrik wergeland was born 200 years ago. he worked in the vicinity of the central bank in periods. his plays were performed at the christiania theatre, which was located at bankplassen, and as national archivist his office was located at akershus fortress, a stone's throw from the central bank. wergeland lived near grønlia below ekeberg. he travelled to town by rowing across bjørvika. he moored his boat near bekkevold ’ s pub on skippergata, which is today known as " grei kafe ". that is also where he met the proprietor ’ s daughter, amelia sofie, who became his wife. 1 wergeland wrote a poem “ follow the call ”, which includes a well known verse : “ but our world must still be young, saga of each race must be still merely its cradlesong and its childhood fairy tale. creatures from the age of chaos [ … ] ” 2 chaos and fear exploded with full force in the financial markets last autumn. we are again witnessing that market participants suffer from a short memory span. crises, imbalances and bubbles house prices in the us started to fall in 2006. there were reports of defaults on mortgage loans, but it was generally believed that the loans at risk were confined to a small segment of the market. the first warning of more severe problems came in winter last year. in the course of summer, it became clear that the losses had spread, and in the first instance to state - owned german banks. other banks, funds and financial establishments in europe, asia and the us also felt the turbulence and gradually losses emerged where we perhaps least expected them. a european colleague compared the financial turbulence to a film production : it was shot in the us, premiered in germany and is now playing all over the world. as you know, it also came to small - town cinemas in norway last autumn. in addition to german banks, a small danish bank and a fairly large british mortgage bank were faced with serious problems. at st james ’ park in newcastle, advertisements for the crisis - hit british bank