not fully recognise the role of expectations and the significance of credible policy rules. during this period, the krone was devalued ten times if we also include “ technical adjustments ”, which also implied devaluation. the many exchange rate adjustments in this period were in part aimed at remedying the deterioration of norway ’ s relative cost level, which in turn was related to the government ’ s attempt to take responsibility for employment also when the social partners failed to do so. gradually, expectations of a continued exchange rate policy that would maintain manufacturing ’ s cost competitiveness became widespread. this weakened the incentives for the social partners to keep wage and cost inflation at a reasonable level. the devaluations contributed to high inflation. when it finally became clear that this could not continue, it took many years before inflation was brought under control and interest rates in norway could be reduced to the level of interest rates in other countries. the other lesson drawn from economic theory and economic policy in the 1960s, 1970s and 1980s was that in the medium and long term it is not possible to reduce employment by accepting somewhat higher inflation. an attempt to increase output beyond the level that is consistent with stable inflation will over time lead to steadily rising inflation. economic agents will eventually incorporate higher inflation into their inflation expectations. in the long run, the result will only be higher inflation, not higher employment. output and employment will return to their supply - determined level. in the long term, output is determined by the supply of labour, capital, technology and adaptability. monetary policy has little effect on these factors. in other words, there is no permanent trade - off between inflation and output. very high inflation is a wartime phenomenon and a phenomenon of the 1970s and 1980s. substantial real economic losses have followed in the wake of high inflation. high and variable inflation impairs the function of prices as an information vehicle. over time, monetary policy can determine the inflation rate. low inflation is monetary policy ’ s contribution to stable, high economic growth over time. the responsibility for interest rate decisions was delegated to norges bank pursuant to the amendment to the 1985 norges bank act and through the change in its application in 1986. the interest rate would no longer be an instrument of industrial or social policy. the last devaluation took place in 1986 after a fall in oil prices. we then shifted to a fixed exchange rate regime. the norwegian economy had to go through an extensive turnaround operation. the objective of monetary policy was

there must be consistency between the stated objectives of economic policy and what is actually done to achieve these objectives. this is exactly what kydland and prescott pointed out in their pioneering work from 1977. 2 their work was based on insights from the theory of rational expectations, an area where robert lucas, who received the nobel prize in 1995, made a significant contribution. 3 economic agents will not systematically misjudge what the authorities plan to do in the future. kydland and prescott showed that room for manoeuvre in economic policy may have a price. the insight they provided was that economic policy can achieve better results if the authorities can commit themselves to a pre - established set of credible policy rules, rather than give themselves the possibility of changing policy at any given time in the future. this was a fundamentally new insight compared with the belief that the authorities had unlimited possibilities for managing the economy, a view that had dominated economic policy in previous decades. skanland, hermod ( 2004 ) : “ doktriner og økonomisk styring. et tilbakeblikk ”, norges banks skriftserie nr. 36 ( “ doctrines and economic management in retrospect ”, norges bank ’ s occasional papers, no. 36 ) ( in norwegian only ). see kydland, f. e. and e. c. prescott ( 1977 ) : “ rules rather than discretion : the inconsistency of optimal plans ”, journal of political economy 85, 473 - 490. lucas, r. e. ( 1976 ) : “ econometric policy evaluation : a critique ” carnegie - rochester conference series on public policy 1, 19 - 46. one example used by kydland and prescott is what can happen when the authorities impose heavy taxes on capital today at the same time as they promise to lower taxes in the future. if firms believe this, they will increase investment now. however, when the increased real capital stock becomes a fact, the authorities may be tempted to disregard their promise of lower taxes. the purpose of reducing taxes has already been achieved. a breach of promise may be accepted once. having learned by experience, however, economic agents will not believe this kind of promise unless the authorities commit themselves to delivering what they promise. in order to function, policy must therefore be timeconsistent and credible. in norway, the devaluation decade from 1976 to 1986 may be an example of economic policy that did