svein gjedrem : monetary policy in an open economy speech by mr svein gjedrem, governor of norges bank ( central bank of norway ), at the confederation of higher education unions, kongsberg, 13 november 2002. the address is based on the assessments presented at norges bank's press conference following the executive board's monetary policy meeting on 30 october and on previous speeches. please note that the text below may differ slightly from the actual presentation. charts in pdf for this speech can be found on norges bank ’ s website. * * * the long - term task of monetary policy is to provide the economy with what we call a nominal anchor, in other words low and stable inflation. price stability is the best contribution monetary policy can make to economic growth and prosperity. low and stable inflation is also norges bank ’ s operational objective. we have had four periods of very high inflation over the past 100 years ; during the two world wars, the korean war and a 15 - year period from the first half of the 1970s to the second half of the 1980s. in norway, very high inflation is a wartime phenomenon and a 1970s and 1980s phenomenon. the fourth period of high inflation was unlike the three previous periods. in the 1970s and 1980s, inflation accelerated gradually. it was not as high as during the two world wars, but it took a long time for the level to fall. the fixed exchange rate system of the post - war period, the bretton woods system, broke down in 1971. the yom kippur war followed two years later, with the opec countries ’ oil embargo and the first oil crisis. the sharp increase in oil prices led to stagnation and higher unemployment in western economies. at the same time, inflation took root in many countries. this was the prelude to two decades where the norwegian economy was marked by instability and high and variable inflation, with subsequent job losses. it took twenty years to bring inflation under control and achieve stable growth in employment, with stable real wage growth and low unemployment. it is important not to forget what went wrong in this long intervening period. at the beginning of the 1970s, the norwegian economy was still characterised by the strong direct control and regulation of the post - war period. important elements were : • fiscal policy oriented towards full employment ; • credit regulation within limits specified in a separate credit budget ; • channelling of loans through the state banks ; • regulation of cross - border lending

bank in 1986. in all the countries that normally figure in our comparisons, monetary policy has now been delegated to the central bank. the delegation of monetary policy decisions to a central bank is underpinned by the need to create stable expectations concerning economic developments and by the favourable experiences of countries such as the us and germany and the less favourable experiences of countries where interest rate changes have been decided on the basis of more short - term considerations. delegation to a central bank promotes credibility, confidence and consistency because the central bank must adhere to the mandate laid down by the political authorities. democratic governance is safeguarded by the government authorities, who define the mandate and assess the results. the mandate provides for professional judgment in a defined area. a year and a half ago, the government and the storting adopted new guidelines for economic policy, which stipulate annual spending of petroleum revenues over the central government budget equivalent to the expected real return on the government petroleum fund. one of the aims is to answer the question of when petroleum revenues should be used. the uncertainty and the speculation surrounding central government spending of these revenues, which could have adverse effects on the mainland economy, can thereby be reduced. at the same time, the government issued a new operational mandate for monetary policy. norges bank shall set the key rate with a view to maintaining low and stable inflation. norges bank ’ s mandate reads as follows : monetary policy shall be aimed at stability in the norwegian krone ’ s internal and external value, if clothing prices had risen at the same pace as other consumer prices, the overall saving for households is estimated at about nok 10 billion in 2002. contributing to stable expectations concerning exchange rate developments. at the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment. norges bank ’ s implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. the operational target of monetary policy shall be annual consumer price inflation of approximately 2. 5 per cent over time. the first paragraph of the mandate sets forth its intentions. the last paragraph specifies what norges bank is required to do. the first sentence in the mandate refers to the value of the krone. stability in the internal value of the krone implies that inflation must be low and stable. low and stable inflation fosters economic growth and stability in financial and property markets. the regulation also states that monetary policy shall be aimed at stability in the external value of the