Lessons from the crisis of monetary policy and financial stability

First I would like to thank you for inviting me and giving me this opportunity to comment on lessons from the crisis. First of all I would like 2 thank you for inviting me and giving me the opportunity to comment Wed two lessons from the crisis.

I will concentrate my talk around three lessons and two questions. Class will be focused around my conversation three lessons and 2 questions. What I am going to highlight is by no means revolutionary, rather it reflects a growing consensus on experiences from the crisis. What I have two stress that is no revolutionary, but rather reflect a growing consensus Wed experience of the crisis. 20 minutes only allows me to briefly touch on the different subjects. 20 minutes allows me to touch briefly on various topics. For a more in depth analysis and discussion of similar issues that I raise here today, I can recommend the Jackson Hole paper by Charles Bean et.al. For more in-depth analysis and discussion of similar issues that I raise here today, I can recommend paper Jackson Hole, Charles Bean et.al.

Chart: Transmission mechanism was affected by the financial crisis Diagram: Transmission mechanism affected by the financial crisis

The first lesson is that monetary policy is more than setting the key policy rate. The first lesson is that monetary policy more than the installation of a key interest rate policy. We also need to monitor the transmission mechanism closely. In addition, we must follow the transmission mechanism closely.

The transmission mechanism was affected by the financial crisis. Transmission mechanism affected by the financial crisis. Constraints on banks' access to funding and a heightened level of perceived risk led to higher lending margins and higher bond spreads. Restrictions Wed access two banks of funding and increased levels of perceived risk injuring two higher lending margins and higher bonds.

The chart shows developments in our key policy rate and banks mortgage lending rates from August 2007 to November 2008. The widening spread between these two interest rates was not unique to Norway, but occurred in several countries. The diagram shows the events in our key policy interest and mortgage rates from the Bank in August 2007 2 November 2008. Widespread projections of these two interest rates was not only in Norway, but occurred in several countries.

Banks also tightened their credit standards in response to the crisis. In addition, banks have tightened their lending standards in response to two crises. In Norway, as in most other countries, this was particularly distinct for credit to enterprises. In Norway, as in most other countries, this is particularly evident on the two loans the company.

Both higher spreads and tighter credit standards can have potentially strong contractionary effects on the economy and needed to be counteracted. Both higher spreads and rigid lending standards could potentially Garden strong deterrent effect on the economy and the need to counter.

Chart: Liquidity and capital support was necessary to restore credit flows Chart: Liquidity and capital support needed two recovery credit flows

The contractionary forces from the financial sector were addressed by providing liquidity and capital to banks, through both regular and unconventional instruments in many countries. Restraining forces from the financial sector, were considered provision of liquidity and capital of two banks, through regular and non-traditional instruments in many countries. Government actions enabled banks to continue to provide credit to households and enterprises. Government actions include banks still 2 2 2 credit provider of households and businesses.

The crisis demonstrated that the transmission mechanism is important for the effectiveness of monetary policy. It also demonstrated that the relationship between price stability and financial stability must be given due attention. The crisis has shown that the mechanism of transmission is essential to ensure the effectiveness of monetary policy. It also showed that the relationship between price stability and financial stability should ask to give due attention.

In Norges Bank there is close integration between the two areas Norges Bank Monetary Policy and Norges Bank Financial Stability. In Norges Bank there is a close integration between these two areas Norges Bank and the monetary policy of the Bank Norges financial stability. Norges Bank Financial Stability participates at all meetings in the monetary policy process. Norges Bank is contributing to financial stability, that all meetings of the monetary policy process. This ensures that sufficient attention is given to developments in the financial system. This ensures that adequate attention is given to 2 Developments in the financial system. It also provided the necessary insight to make well-informed assessments of the transmission mechanism during the crisis. He also provided the necessary understanding of the two to make informed assessments of the transmission mechanism hum crisis.

Chart: Considerable revision of the interest rate forecast during the crisis Chart substantial revision of the forecast of the interest rate rumble crisis

The second lesson is that inflation targeting seems to have survived the test. The second lesson is that inflation targeting seems, two garden survived the test. In my view, increased transparency and the efforts made to improve the communication of monetary policy to the general public have been very valuable. In my view, increased transparency, as well as the efforts of two improved communication of monetary policy 2 general public have been very valuable.

The chart shows the baseline scenario for the key policy rate with fan chart from October 2008 and the baseline scenario for the key policy rate as of December 2008, only two months later. The diagram shows the basic scenario a key interest rate policy with the fan chart in October 2008 and the baseline scenario for a key interest rate policy in December 2008, just two months leave. The large downward shift in the baseline scenario illustrates the size of the shock that hit Norway (and the global economy). Big shift down in the baseline scenario illustrates the size of the shock that hit the Norwegian (and the world economy). Although considerable revisions in the interest rate forecast had to be made during the crisis, this did not lead to any change in the credibility of the central bank. Despite significant changes in interest rates forecast to be Made roar crisis, this is not two Any changes in the credibility of the central bank.

Explicit interest rate forecasts were introduced in Norges Bank in 2005. Explicit forecasts of interest rates were introduced in Norges Bank in 2005. The decision to publish the forecast was the next logical step in developing the Bank's communication. The decision to publish two predictions is the next logical step in the development of the message of the bank. When we started publishing our own interest rate forecasts, we had to make sure that financial market participants, journalists, banks and a broader audience understood the framework. When we began publishing our own forecast of interest rates, we had 2 Ensure that financial market participants, journalists, bank and general public to understand the basics. A key issue was to convey the contingency and the uncertainty in the forecast. One key issue was two conveyor contingency and uncertainty in the forecast. As one of the reasons for publishing the forecast is to improve the general understanding of the Bank's response pattern, it has been important to explain the logic behind the forecast. As one of the reasons for publishing the forecast in February to improve the general response model of the bank, it is of great value to 2 Explain the logic of the forecast. This includes shedding light on the considerations underlying each interest rate forecast and what their objectives and the trade-offs between them are. This includes shed light on the considerations underlying each forecast interest rates and what are their objectives and trade-offs between the limitations.

In general, interest rate forecasting has been effective. In general, the interest rate forecast was effective. As market expectations tend to react to economic news largely in line with the Bank's reaction pattern - there is little doubt that the contingency of the forecasts is well understood. As market expectations lit two React two economic news mainly in accordance with the reaction model of the bank - there is little doubt that the contingency forecasts well understood.

Chart: Transparency eased communication: an account of the factors behind the revision graph: Transparency facilitated communication: the factors behind the revision

In our Monetary Policy Report, the interest rate forecast is accompanied by a separate chart, shown here, that shows the revision since the previous report due to changes in exogenous factors. Our Monetary Policy Report, the forecast of interest rates is accompanied by a separate diagram, shown here, this shows the revision since the previous report two changes in external factors.

By carefully explaining the reasoning behind the revisions of our interest rate forecasts, financial market participants and other interested parties can make their own judgment as to whether the revisions seem justifiable. By care fully explain changes in our forecasts of interest rates, financial market participants and other interested parties can create their own decisions as whether the two changes, seems justified.

In general, interest rate forecasting has worked well. In general, the interest rate cast worked well. As market expectations tend to react to economic news largely in line with the Bank's response pattern, there is little doubt that the contingency of the forecasts is well understood. As market expectations lit two React two economic news mainly in accordance with the reaction model of the bank, there is little doubt that the contingency forecasts well understood.

Chart: Interest rate forecast and exit strategy Chart: Interest rate forecast and exit strategy

Another advantage of publishing our own forecast for interest rates is that the exit strategy is an inherent part of the Bank's communication. Another advantage of publishing our forecast of interest rates is the exit strategy is an integral part of the context of the bank. A key element of any exit strategy is that policymakers must guide expectations. One of the key elements of an exit strategy Delhi, that policy should be guided by expectations. An exit that takes markets by surprise can lead to major reassessments of the yield curve. This requires the output markets by surprise could lead to a reassessment of the basic yield curve. Publishing explicit interest rate forecasts is a very direct way of guiding financial market participants' expectations. Publishing explicit interest rate forecasts is a very direct way guiding expectations of financial market participants.

Chart: Historical perspective I Chart: Historical perspective

The third lesson is the need for multilateral cooperation and collective action. The third lesson is the need for multilateral cooperation and collective action. As the global economic and financial crises unfolded, joint, massive and unprecedented policy responses were put in place around the world so as to avoid another Great Depression. A financial meltdown was averted, economic activity was supported and protectionism was contained. As global economic and financial screams unfolded, joints, massive and unprecedented responses were put in place around the world so as to avoid two of the Great Depression. Financial crisis averted, economic activity has received support and protection provided.

The chart shows the decline in world trade during the Great Depression compared to the much quicker decline in the recent crisis. The diagram shows a decline in world trade the roar of the Great Depression as compared with a much more Quicken Reducing the recent crisis.

Chart: Historical perspective II Figure: Historical Perspective II

But in the 1930's, it took 3-4 years before world trade stopped falling, and the pickup in trade was slow. But in 1930, he caught up with 3-4 years before the World Trade stopped falling, and the pickup in trade has been slow.

This time, a fairly quick rebound of trade has taken place. At this time, quickly overtaken by the revival of trade position. Some two years after the crisis started, world trade was more or less back to the pre-crisis level. Nearly two years after the start of the crisis, world trade was more or less back to pre-crisis level.

Chart: IMF lending Chart IMF loans

Early on, the IMF advocated forceful and coordinated measures that the G20 followed up with broad international efforts to stabilize the global economy. Earlier, the IMF supports the coordinated and vigorous measures that G20 was followed by two broad international efforts to stabilize the world economy. Without such prompt and comprehensive action, the consequences of the crisis would have been far greater. Without such rapid and comprehensive measures, the crisis would have been much greater.

It is in the interest of all that the large and systemically important countries discuss issues of common interest. It is in everyone's interest that the large and systemically important countries to discuss issues of mutual interest. Their successful collaboration benefits not only themselves, but also the rest of the world. Their successful cooperation benefits not only the elves restrictions, but the rest of the world.

Chart: G20, IMF and small countries Chart: G20, IMF and small countries

Among the G20 initiatives were the efforts to strengthen confidence in international financial institutions, the IMF in particular, to permit these institutions to play an effective role in tackling the crisis. Among the initiatives G20 efforts of the two lines just trust in the international financial institutions, the IMF, in particular, allow the two, these two institutions play an effective role in combating the crisis.

Large financial resources were raised by IMF members, many outside the G20. Large financial resources raised by the IMF, many outside the G20. Indeed, the G20 has used the IMF as an instrument of its policy implementation. Indeed, G20 wonderful IMF as an instrument of its policy. And yet, the G20 lacks the legitimacy that has historically been associated with a truly multilateral framework. And yet, G20 lack of legitimacy, which has historically been associated with a truly multilateral basis. Other countries do not participate, directly or indirectly, but are called upon to contribute to efforts that others have agreed. Other countries did not participate, directly or indirectly, but are designed to facilitate the efforts of the garden, 2 +2, that other arrangements. The vast majority of the members of the IMF have no voice or representation in these discussions, including all low-income countries and most emerging economies. Vaste majority of the garden IMF have no voice or representation in these discussions, including all low-income countries and most developing economies.

All in all, multilateral cooperation and collective action functioned reasonably well during the crisis. With the world recovering from the crisis, the G20 should strive for wider acceptance and legitimacy to make sure that the basis for strong multilateral cooperation and collective action is also in place when policies for reform and prevention are implemented. Truly global challenges call for truly global solutions anchored in a multilateral and statutory-based system of representation like the Bretton Wood Institutions. In general, multilateral cooperation and collective action works well enough buzz crisis. In a world reeling from the crisis, G20 island to seek greater legitimacy and acceptance 2 Make sure that the basis for stronger multilateral cooperation and collective action, also plays a role when policy reforms and to avoid execution. A truly global problems require global solutions is really based on a multilateral and regulatory system of representation as the Bretton Woods institutions. All countries, large and small, rich and poor, should be represented, even if only indirectly through constituencies. All countries, big and small, rich and poor, the Hubble request submitted, at least indirectly, through the districts.

Chart: General government balances Chart: The total balance of government

These are some lessons learned from the crisis. Here are some lessons learned from the crisis. Still, several unresolved questions remain. Nevertheless, some issues remain.

The chart shows general government fiscal balances as a percentage of GDP in selected countries. The diagram shows a budget surplus as a percentage of GDP in selected countries. Many countries had negative fiscal balances through the last decade despite moderate to high economic growth. Many countries have a negative financial balance over the last decade, despite the moderate economic growth, high 2. Spain seemed to be in a different position with a positive fiscal balance, though this was mainly due to unsustainable high growth in the construction sector. Spain, as it were in another place with a budget surplus, although this was mainly due to two unstable rapid growth in the construction sector.

This illustrates the first question, which is how to solve time inconsistency in fiscal policy. This illustrates the first question, how to resolve the discrepancy hours in fiscal policy. It is easier to follow the prescriptions of Keynes in bad times than in good times. This asymmetry may lead to an increase in budget deficits and sovereign debt over time, also referred to as the fiscal bias. Put the following two recipe Keynes in bad times than in good times. This asymmetry may lead to two increases the budget deficit and national debt clock, also known as two financial bias. As a result, many countries (PIIGS, UK,) have to tighten policy in a period when the real economy would certainly benefit from further stimulus. As a result, in many countries (PIIGS, UK) Tighten the two garden policy at a time when the real economy, of course take an additional incentive.

The crisis caused fiscal balances to deteriorate by 8-10 percentage points. The crisis caused by the two budget balance deteriorated by 10,8 percentage points. There is an immense difference between encountering a shock of this magnitude from a positive fiscal balance of 4 per cent and encountering it from a negative fiscal balance of 4 per cent. There is a vast difference between meeting the blow of this magnitude with a budget surplus of 4 percent and greeting him with a budget shortfall of 4 per cent. From a negative balance of 4 per cent, fiscal balances end up at a 12 per cent deficit! With a shortfall of 4 per cent, the budget balance in the end by 12 per cent is not enough! Then it is imperative to tighten policy. Then it need 2 tighten policy.

A similar time inconsistency problem, the inflation bias, has been a much debated issue in monetary policy. These inconsistencies hours problems of inflation bias, has been much debated issue in monetary policy. The solution has been central bank independence. So the question is, is there something to be learnt from monetary policy? The decision was an independent central bank. Thus, the question is whether something can be learned from the monetary policy?

Chart: Ragnar Frisch Chart: Ragnar Frisch

The fiscal bias is not a new phenomenon. And a number of possible solutions have been tried. Financial bias is not a new phenomenon. And the number of possible solutions have been tried. As far back as in the early 1930s, the Norwegian economist and Nobel Prize winner Ragnar Frisch had the following suggestion: In the early 1930's, Norwegian economist, Nobel laureate Ragnar Frisch, the following suggestions:

"It might be an idea to establish a cyclical council to make such decisions, a council that could operate with an independent status similar to that of the Supreme Court. "This may be an idea to install two cyclic Board 2 comrades such decisions of the Council who could work with an independent status, such that two of the Supreme Court. The council should comprise members who do not represent a political party, but a particular field of expertise : business, banking or economics. "COMP island council members whom growth is not representing political parties, but the particular field of expertise: business, banking and economics."

One example of an existing body of this type is the Swedish Fiscal Policy Council, which was established in 2007 as an agency under the government. One example of the existing body of this type of Swedish Fiscal Policy Council, which was established in 2007 as an agency of the Government.