Press Release | Lars E.O. Svensson

Norges Bank Watch 2002 released
September 19, 2002

“Monetary policy in Norway is equal to the best international practice of flexible inflation targeting. But the legal framework for monetary policy is among the weakest in the world,” Professor Lars E.O. Svensson, Princeton University, concluded today when a report from Norges Bank Watch 2002 was released.

Svensson chairs a committee appointed by the Centre for Monetary Economics (CME) at the Norwegian School of Management BI that includes Chief Economist Kjetil Houg, Alfred Berg, Doctorate Student Haakon Solheim and Professor Erling Steigum, both at Norwegian School of Management BI.

“Sentralbankloven (the Central Bank Law) needs to be reformed, to give Norges Bank a mandate for price stability, formal operational independence, and clear accountability for achieving the mandate. Norway is far behind other countries in Europe and the rest of the world, where such reforms have already been completed. This is the best way to make sure that democratically chosen monetary-policy goals are fulfilled in the long run,” Svensson said. “The committee also makes several recommendations that can improve the institutional framework within the existing law.”

“Regarding the conduct of monetary policy, Norges Bank compares well with best-practice central banks, like the Bank of England and Sweden’s Riksbank,” Svensson said. “But the committee still have a number of recommendations for improvements, mostly of a technical nature. These improvements could make Norges Bank a clear world leader in inflation targeting.”

“The current public debate about the real appreciation of the krone and its consequences seems a bit confused. Many debaters do not seem to realize that the real appreciation and the high real interest rate are likely consequences of the new fiscal policy. Monetary policy cannot prevent this, and monetary policy should not be blamed,” Svensson said. “Perhaps the Bank could do a better job of explaining this to the general public.”

“The committee also has some recommendations for research priorities at Norges Bank.”

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The committee’s recommendations for improvement of the institutional framework within the existing law are:

Inconsistencies in the guidelines for monetary policy, more precisely, the references to exchange-rate stability, should be removed.
The government should appoint experts in monetary policy and related areas to the Executive Board, since meeting the government’s inflation target is mostly a technical activity.
The nominations of Board members by political parties should be discontinued, to reduce the risk of policy influenced by special interests.
More material from the Executive Board meetings should be published, to increase the transparency of monetary policy.
An annual evaluation of the Bank’s policy by the Ministry of Finance should be included in the annual Kredittmelding (an annual report to the Storting), to improve the monitoring of the Bank.
Regular hearings on monetary policy should be held with Bank officials in the Storting.
A biannual public conference should be organized with invited experts evaluating the Bank’s policy.

The committee’s recommendations for the improvement of the conduct of monetary policy are:

Published inflation projections should be conditional on the Bank’s best forecast of its future interest-rate settings. Thus, normally a time-varying interest-rate path would be used instead of the current constant instrument-rate path. This would remove a number of problems and inconsistencies with the current practice. It would also improve the predictability of interest-decisions and the Bank’s communication with the market.
Projections of the output gap should also be published, since concern about output-gap stability is a part of flexible inflation targeting.
The Bank should put less emphasis on the rule that the two-year-ahead inflation projection should be on target and instead set interest rates so as to achieve a good compromise between the inflation and output gap projections.
Probability-average (“mean”) projections should be used instead of current highest-probability (“mode”) ones. This is in line with established theory and will make the balance-of-risk adjustment of the projections simpler or even unnecessary.
The Bank should consider being more explicit about the weight it puts on output-gap stabilization relative to inflation stabilization. This way it would be more transparent and allow more precise external evaluation.

This is the third Norges Bank Watch released by CME.

Copies of the report and an executive summary are available on CME’s website at http://www.bi.no/ and Professor Svensson’s personal website. The first page of the report lists the committee members email addresses where they can be contacted.