Exchange rate target or inflation target for Norway ?

The purpose of this paper is to discuss the choice between an exchange rate target and an inflation target for Norway. The paper also contains a brief discussion of the objectives of monetary policy and of an optimal delegation of monetary policy in a representative democracy, which serves to place this choice in a broader context. 1 Monetary policy goals Let me start from the presumption that the ultimate objective of economic policy is to guarantee and enhance the citizens' welfare. This ultimate objective is often expressed as a number of separate goals which contribute to the citizens' welfare, e.g. efficient resource utilisation, full and stable employment, high economic growth, price stability, equitable distribution of wealth, regional balance and environmental protection (see SOU 1993:20). Monetary policy is part of economic policy. At first, one might think that monetary policy should have the same goals as overall economic policy. However, since monetary policy only has systematic effects on a limited number of variables that affect economic welfare it is more appropriate that monetary policy is assigned a limited number of goals. Specifying goals for monetary policy that it can never achieve would, of course, be improductive, and even counterproductive. Instead, monetary policy should be assigned goals that it can achieve and that are consistent with the ultimate objective for economic policy. In order to determine which goals are most suitable for monetary policy, one must therefore understand the effects of monetary policy and what monetary policy can achieve.