...communication be transparent, but indeed to divert people's attention from your true reaction pattern. Today, most central banks, including the ECB, consider transparency crucial. The ECB publicly announces its monetary policy strategy and regularly communicates its assessment of economic developments. Norges Bank goes even further than this by publishing its own interest rate forecast.

If one asks the question: "What are the similarities and dissimilarities between the ECB and Norges Bank?", one should bear in mind what Alan Blinder and Charles Wyplosz said at the American Economic Association conference last year: "The appropriate volume and methods of central bank communication depend crucially on the nature of the monetary policy committee." (1) So what is useful and correct in Oslo may not be the best solution in Frankfurt. The MPCs are set up in different ways. There is not necessarily "one fit for all". shall therefore explain what we do in Oslo in terms of communication and strategy and share with you our experiences so far. I will also comment on the ECB practices.

2. The forecast contingent on the central bank's own interest rate forecast

When our MPC (2) decided to move forward and publish a forecast of the central bank's interest rate path, the decision was based on several arguments. One was the well established theoretical argument that monetary policy mainly works through expectations. Monetary policy is only effective if the central bank is able to influence interest rate expectations. Michael Woodford expressed this very clearly when he stated that monetary policy is the "management of expectations". "For not only do expectations about policy matter, but (...) very little else matters" (3)

The central bank has an almost "one-to-one" impact on the shortest money market rates. The shortest rates, however, are of limited importance. How can central banks influence interest rate expectations? When inflation targeting was in its infancy, inflation targeters typically started out by assuming a constant interest rate (CIR) in their inflation reports. If the inflation forecast was above target at the announced time...

NOTE: All illustrations and photos have been removed from this article.



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