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The Great RecessionLessons for Central Bankers$
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Jacob Braude, Zvi Eckstein, Stanley Fischer, and Karnit Flug

Print publication date: 2013

Print ISBN-13: 9780262018340

Published to MIT Press Scholarship Online: January 2015

DOI: 10.7551/mitpress/9780262018340.001.0001

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Lessons from the World Financial Crisis for the Central Bank of Norway: The Approach to Monetary Policy and Financial Stability

Lessons from the World Financial Crisis for the Central Bank of Norway: The Approach to Monetary Policy and Financial Stability

Chapter:
(p.269) 10 Lessons from the World Financial Crisis for the Central Bank of Norway: The Approach to Monetary Policy and Financial Stability
Source:
The Great Recession
Author(s):

Sigbjørn Atle Berg

Øyvind Eitrheim

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262018340.003.0011

Norway was, like many small open economies, adversely affected by the recession that followed the global financial crisis. But in an international perspective, the Norwegian economy and institutions were less affected by the crisis than many other countries. Norway's approach to monetary policy, flexible inflation targeting, was already in place when the crisis hit, and it benefitted from having established a credible and transparent framework for communication of Norges Bank's policy intentions. One lesson was that monetary policy is more than setting the policy rate. Appropriate and adequate liquidity measures were required to improve the functioning of the financial markets. The international experience shows that inflation targeting per se is not sufficient, neither for price stability nor for financial stability. Although Norway benefited from lessons from the Nordic financial crisis in the 1990s, the recent crisis revealed weaknesses in the policy framework for financial stability, suggesting a need to look creatively for macroprudential instruments, and improvements in the resolution regime for troubled banks. Flexible inflation targeting proved to be a robust framework for monetary policy during the crisis, and successfully provided the necessary room for maneuver for Norges Bank in its pursuit of price stability and financial stability.

Keywords:   Financial crises, Monetary policy, Macroprudential policy, Small open economies

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