discussion in international economic literature. 4 the discussion has arisen as a result of the different solutions chosen by different central banks for different reasons. it has been argued that the central bank might feel too bound by a previously announced interest rate path. publication of the bank ’ s interest rate forecast might impose constraints on monetary policy, making it more difficult to adjust the interest rate to changes in economic developments. the interest rate path may be perceived as a straightjacket, preventing the central bank from pursuing the policy it considers to be appropriate at any given time. in addition, if the central bank should deviate from the previously published interest rate forecast, the bank might be accused of misleading the market. confidence in the central bank may thereby be undermined. some economists stress that a published interest rate forecast may create problems in the practical implementation of monetary policy. results published in the literature, however, seem to point in a different direction. first, any constraints a published interest rate forecast might entail are not necessarily a disadvantage ; on the contrary, they may be an advantage. indeed, if interest rate expectations can be influenced, a response pattern that is binding for a shorter or longer period will in many cases be useful for a central bank. by being committed to a response pattern, the need for interest rate changes today may be reduced. from mid - 2003 to mid - 2004, for example, the federal reserve was concerned that inflation might fall too low. the fed therefore indicated that market participants should expect an expansionary monetary policy for longer than usual in periods of increasing activity. 5 norges bank has made similar statements about the future interest rate. for example, from mid - 2004 to the beginning of 2005, the bank stated that “ the prospect of continued low inflation in norway also implies that we should lag behind other countries in setting interest rates at a more normal level ”. statements such as this are intended to influence market expectations. similarly, there may be advantages of publishing an explicit interest rate forecast. this may lead to commitments that increase the credibility of consistent interest - rate setting by the central bank. nevertheless, statements related to the interest rate path can still be useful as they can provide arguments against the publication of an explicit interest rate forecast by the central bank are discussed in more detail in goodhart, c. ( 2001 ) : “ monetary transmission lags and the formulation of the policy decision on interest rates ”, federal reserve bank of st. louis review, july / august 2001 ( http : / /

interest rate. hence, in order to make forecasts for inflation and output, we must also judge how interest rates will develop in the future. the interest rate can be approached in various ways in forecasting. there might be arguments in favour of basing the interest rate assumption on external factors, as an exogenous assumption, either by assuming that the interest rate will remain constant through the projection period or that it will develop in line with market expectations. the projections that result from such technical interest rate assumptions do not necessarily provide a reasonable balance between the different objectives of monetary policy. in some cases, both the interest rate assumption and the projections may seem unreasonable. this may raise the question of the purpose of forecasting. however, it provides a starting - point for discussions about how the interest rate path might be adjusted to produce more acceptable results. alternatively, the interest rate can be treated in the same way as other variables forecast by the bank. we would then have to try to make projections for inflation, output and the interest rate simultaneously, with the aim of arriving at an interest rate path that provides a reasonable balance between the different objectives of monetary policy. if the central bank has the intention of adhering to this interest rate path, this might be regarded as an interest rate forecast rather than a technical assumption. establishing such an interest rate path is not a straightforward matter. flexible inflation targeting, which is the system we use, means that the deviation from the inflation target and the output gap are both taken into account. there is considerable uncertainty surrounding the calculation of the output gap, and there is no simple relationship between developments in the output gap and developments in inflation. it cannot therefore be claimed with any great certainty that it is possible to identify one particular interest rate forecast that provides the indisputably “ best ” trade - off in monetary policy. more often than not, there will be a number of possible interest rate paths that might be said to provide a reasonable balance, in view of the uncertainty involved. norges bank ’ s treatment of the interest rate in forecasting has changed over time. in 1999 and 2000, forecasting was based on the assumption that the interest rate would develop in line with market expectations as indicated by forward interest rates. in 2001 and 2002, the bank based its forecasting on the assumption that the interest rate would remain constant to the end of the projection period. the constant level of the interest rate was calculated on the basis of historical averages, although the historical period on which