##½ per cent over time. the objective of low and stable inflation provides the economy with a nominal anchor. monetary policy shall also contribute to stabilising output and employment. in a small, open and decentralised market economy like norway, and with our particular industry structure, there will be cyclical fluctuations. when economic agents have confidence that inflation is low and stable over time, the interest rate can also be set with a view to dampening the fluctuations somewhat. monetary policy in norway is in line with the monetary policy conducted by most central banks in the oecd area. the challenge of monetary policy is how the interest rate should be set ahead in order to bring inflation close to target while avoiding an overheating of the real economy. as a general rule, central banks influence the shortest money market rates via the key policy rate. however, economic agents ’ consumption and investment decisions depend more on their interest rate expectations. hence, monetary policy functions primarily by influencing expectations regarding future interest rates. economic agents therefore need to understand the central bank ’ s intentions in its interest rate setting. in the november 2005 inflation report, norges bank published its own forecast for the interest rate for the first time. the aim is to enhance the predictability of monetary policy. with a predictable monetary policy, market participants can react to new information in a way that contributes to stabilising developments in output and inflation. norges bank ’ s interest rate forecast should satisfy two main criteria. first, the interest rate should be set with a view to stabilising inflation close to the target in the medium term. the horizon will depend on disturbances to which the economy is exposed and the effects on the path for inflation and the real economy ahead. second, the interest rate path should provide a reasonable balance between the path for inflation and the path for capacity utilisation. in the assessment, potential effects of asset prices, such as property prices, equity prices and the krone exchange rate on the prospects for output, employment and inflation are also taken into account. norges bank forecasts inflation, output and the interest rate simultaneously. there is considerable uncertainty associated with the forecasts for capacity utilisation in the economy ( the output gap ), and there is no simple relationship between developments in capacity utilisation and inflation. it cannot therefore be argued with great conviction that it is possible to identify one particular interest rate forecast that provides the indisputably “ best ” trade - off in monetary policy. more often than

jan f qvigstad : comments on lars e o svensson's lecture " policy expectations and policy evaluations – the role of transparency and communication " speech by mr jan f qvigstad, deputy governor of norges bank ( central bank of norway ), at the conference " ten years of riksbank independence ", stockholm, 11 september 2009. * * * introduction it was a great pleasure to accept the invitation to discuss professor and fellow central bank deputy governor lars svensson ’ s lecture in connection with the tenth anniversary of riksbank independence. in his lecture, lars svensson discussed communication, credibility and monetary policy evaluation. he looks at general issues for central banks seeking to influence key rate expectations, using the riksbank as an example. 1 i will not venture to remark on the riksbank ’ s assessments but will offer my comments on the same issues in the light of norges bank ’ s experience of interest rate forecasts. there are a number of similarities between the communication strategies of the riksbank and norges bank. and underlying these strategies is a model developed by, among others, lars svensson. in his lecture today, he described how to arrive at an interest rate path that “ looks good ”. he showed, as he has on many previous occasions, that this can be formalised by finding the interest rate path that minimises a given loss function. when does the interest rate “ look good ”? svensson raises the issue of whether monetary policy is well balanced, not only ex - post but also ex - ante. in his presentation today, he presents a system for evaluating and ranking different policy alternatives, showing how taylor diagrams can be used to evaluate whether one interest rate forecast results in lower volatility in inflation and the output gap than another. if a forecast results in inflation closer to target and a narrower output gap through the forecast period, this forecast is selected. on other occasions, the choice between two forecasts can be more problematic. the forecast that is selected will depend on preference and the considerations that are given weight. i completely agree with lars svensson that policymakers must rank the different policy alternatives based on their preferences. in some cases, policymakers may wish to keep the interest rate high while in others a low interest rate may be preferred. however, it is equally important to take account of preferences over time, i. e. having a system to check whether the preferences underlying the baseline scenario in one report