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Throughout their long history, the primary concern of central banks has oscillated between price stability in normal times and financial stability in extraordinary times. In the wake of the recent global financial crisis, central banks have been given additional responsibilities to ensure financial stability, which has sparked intense debate over the nature of their role. Bankers and policy makers face an enormous challenge finding the right balance of power between the central bank and the state. This volume is the result of an international conference held at Norges Bank (the central bank of Norway). International experts and policy makers present research and historical analysis on the evolution of the central bank. They specifically focus on four key aspects: its role as an institution, the part it plays within the international monetary system, how to delineate and limit its functions, and how to apply the lessons of the past two centuries.
Dear conference participants, it is a great pleasure for me to welcome all of you to the Sixth Norges Bank Monetary Policy Conference. Norges Bank and the Institute for Monetary and Financial Stability are privileged to host this conference, which has attracted the interest of such a distinguished group of international experts.
Given that we are going to talk about inflation targeting, I will take this opportunity to set the stage by summarising the Norwegian experience. Since the beginning of the 1980s there has been a broad international consensus that monetary policy must be geared towards price stability. This paradigm shift also reached Norway, but not until the end of that decade.
The starting point for us in Norway was a high and variable inflation rate of around 8 to 9 per cent combined with frequent devaluations. In the period from 1976 to 1986 the government carried out no fewer than ten de facto devaluations of the krone. The devaluation in 1986 would become the last in the series, however. The government recognised that the repeated devaluations were ineffective; confidence had been lost, and inflation had soared without a fall in unemployment. There was a broad political agreement that Norway should follow the rest of the world.
In the first phase of the new era (see Figure 2.1) Norway pursued a fixed exchange rate against European currencies with no devaluations.
There is now a remarkably strong consensus among academics and professional economists that central banks should adopt explicit inflation targets and that all key monetary policy decisions, especially those concerning interest rates, should be made with a view to ensuring that these targets are achieved. This book provides a comprehensive review of the experience of inflation targeting since its introduction in New Zealand in 1989 and looks in detail at what we can learn from the past twenty years and what challenges we may face in the future. Written by a distinguished team of academics and professional economists from central banks around the world, the book covers a wide range of issues including many that have arisen as a result of the recent financial crisis. It should be read by anyone concerned with better understanding inflation targeting and its past, present and future role within monetary policy.
The first country to adopt inflation targeting (IT) in its formal definition was New Zealand, which first announced a consumer price index (CPI) inflation target in 1989 as part of its economic reform and restructuring effort. IT was therefore twenty years old by the time of the conference in Oslo at Norges Bank, Norway's central bank, in June 2009 at which the contributions in this volume were originally presented – a conference sponsored jointly by Norges Bank and the Institute for Monetary and Financial Stability (IMFS) of the Goethe University in Frankfurt. The anniversary seemed a good time for some deeper and longer reflection. In organising the conference and putting together this book, we therefore sought answers to a wide range of questions, from the nature and causes of the spread of IT through the degree of its success as a monetary policy strategy to the ways in which it is developing and may develop in the future.
Formal inflation targeting can be considered as involving (i) the prior announcement of a quantitative target for a specific measure of inflation; (ii) an emphasis by the central bank as policymaker on communicating both the reasons for the decisions it has taken and the type of decisions it is likely to take in the future, including in particular the publication of its inflation forecasts; and (iii) a high level of accountability for the central bank via the publication of information on its decisions and regular appearances before relevant public bodies.
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