jan f qvigstad : on the topic of keeping promises speech by mr jan f qvigstad, deputy governor of norges bank ( central bank of norway ), at a seminar arranged by norges bank and det norske videnskaps - akademi ( the norwegian academy of science and letters ), oslo, 11 november 2008. * 1. * * why is keeping promises so difficult? this house, which now belongs to the norwegian academy of science and letters, was built by hans rasmus astrup in 1886 - 87. astrup was an entrepreneur. at the age of 20, he left norway for barcelona on a ship laden with a cargo of dried cod. he gradually built up a large trading business and later became an industrialist, not unlike businessmen of our own era. 1 for innovators and the business sector, a stable operating environment has always been important, providing a foundation for adaptation, economic growth and social progress. a stable value of money is also a component of this foundation. we were taught as children to keep our promises. if we made a promise, we had to make good on it. but we were also taught that we should not promise too much. if we do not keep our word, others lose confidence in us and our credibility takes a toll. in recent months, we have witnessed that this is of particular importance for the financial system. a proximate example is the situation in our neighbouring country iceland. the value of confidence and credibility has been the subject of extensive analysis in many fields, including jurisprudence and the social sciences. one conclusion is clear – progress can be achieved if promises are kept. if keeping promises is clearly beneficial, why is it then so difficult? the expressions empty promises and empty threats reflect the temptation to renege. the social scientist and philosopher jon elster writes in his book “ ulysses and the sirens ” 2 about weakness of will, shifting preferences over time, and the complexities of human nature. this is familiar ground. as early as 1960, the economist thomas schelling 3 discussed similar issues in analyses for which he was awarded the nobel prize in economics. according to schelling, a credible threat can be difficult to establish when realising the threat involves costs for all the parties involved. a promise or a threat will be more credible if the person who has made the promise ties himself to the mast. two other economists carried out groundbreaking work when they applied schelling's analysis to economic

explanation of their ruling, the supreme court also referred to “ vital national interests ”. it would cost norwegian taxpayers far too much to repay the gold money that had been borrowed 60 years earlier. it would be far too pretentious of me to offer an opinion on the court ruling as such. what makes this case interesting in the light of today's topic is that in the supreme court's assessments of “ vital national interests ”, there is no discussion of what the nation's interests are in the short term versus the long term. however, it must be added that it is probably not easy for a court to review other government authorities ’ assessments of this point. there is also the question of whether this falls within the court's purview. 5. modern monetary policy – a promise both possible and right to keep the theoretical breakthrough by kydland and prescott and the era of high inflation eventually had implications for practical policy. it was observed that countries where weight was given to low inflation recorded favourable economic developments. theoretical works published some years later showed that expected and rules - based policy could stabilise the economy provided price and wage rigidity existed. some examples are : fischer ( 1977 ) : “ long - term contracts, rational expectations, and the optimal money supply rule ”, journal of political economy, 85, no. 1, pages 191 - 206 ), taylor ( 1980 ) : “ aggregate dynamics and staggered contracts ”, journal of political economy, 88, no 1, pages 1 - 24 and calvo ( 1983 ) : “ staggered prices in a utility - maximizing framework ”, journal of monetary economics, 12, no. 3, pages 983 - 998. only when these articles were published was the theoretical basis in place for keeping promises while at the same time allowing monetary policy to contribute to stabilising the economy. see reference in footnote 13. see eitrheim, øyvind ( 2005 ) in eitrheim and qvigstad ( eds. ) : “ tilbakeblikk pa norsk pengehistorie. konferanse 7. juni 2005 pa bogstad gard ( norwegian monetary history in retrospect. conference, 7 june 2005, oslo ) ”, occasional papers no. 37, norges bank. bahr, henrik ( 1962 ) : “ høyesteretts dom i gullklausulsaken ( the supreme court ruling in the gold clause case )