Accountability means bearing responsibility for one's actions. For accountability to be effective, there should be clarity about (a) the delegation of authority, (b) the objective, and (c) the appropriateness of actions taken to reach the objective.20
The delegation of authority concerning monetary policy is ruled by the Norges Bank Act of 1985, but as explained in section 6.2, the legal framework leaves scope for undesirable political pressures and ambiguity about the responsibility for monetary policy decisions. In practice, Norges Bank enjoys a large degree of operational independence in the setting of interest rates, but weakness in the formal delegation of responsibility is a serious issue for accountability. To alleviate these problems, it would be desirable to adopt a more explicit, stricter override mechanism. Furthermore, we strongly recommend that Norges Bank submits the interest rate decision to the Ministry of Finance only after the monetary policy meeting.
The objective of monetary policy is specified in the March 2001 Regulation on Monetary Policy in the form of an explicit target for annual consumer price inflation of approximately 2.5 per cent over time (§ 1, third paragraph), excluding the direct effects on consumer prices resulting from changes in interest rates, taxes, excise duties and extraordinary temporary disturbances (§ 1, fourth paragraph).
Based on these escape clauses, Norges Bank has decided to focus on CPI-ATE rather than CPI inflation, but as Chapter 5 indicates, it may not be an ideal measure for this purpose. Although the escape clauses give the Bank the flexibility to choose the optimal inflation measure, the lack of an explicit inflation measure for the target in the Regulation is problematic for accountability.
The meaning of 'approximately' in the inflation target is clarified in the letter from the Ministry of Finance to Norges Bank of 26 March 2001: "As a main rule, consumer price inflation is to remain within an interval of +/-1 percentage point around the inflation target." In addition, in its Guidelines for Economic Policy (Report no. 29 to the Storting, 2000-2001), the Ministry of Finance explains that
"[t]he provision is to be construed to mean that deviations between actual inflation and the target in a period shall not be compensated for in a later period." So, annual inflation every year is a more suitable measure than average inflation over a few years.
Together, these statements suggest that a criterion for the evaluation of monetary policy would be a level of annual CPI-ATE inflation between 1.5 and 3.5 per cent every year. Judging by this benchmark, Norges Bank failed to meet its objectives in 2003 as the annual rate of CPI-ATE inflation was 1.1 per cent. However, using the measures for underlying inflation discussed in chapter 5 gives a very different picture. To be precise, the annual rates of the 10 per cent trimmed mean, the 20 per cent trimmed mean and the weighted median of CPI-AT inflation in 2003 were 1.9 per cent, 2.0 per cent and 2.8 per cent, respectively, which is fully consistent with the target specified in the mandate.
20 See De Haan, Amtenbrink and Eijffinger (1999) for a central bank accountability index.
An assessment of the appropriateness of actions is critical for the accountability of monetary policy, because there are many unforeseeable circumstances that may cause the Bank to miss its target despite its best intentions. To gauge whether monetary policy actions are appropriate requires a considerable degree of transparency. Unfortunately, as we explained in section 6.2, the transparency of Norges Bank is far from perfect.
To enable accountability it is useful to have formal disclosure requirements. Norges Bank is subject to the following four:
(i) "The Bank shall inform the public about the monetary, credit and foreign exchange situation"
(Norges Bank Act, § 3, third paragraph). The publication of Norges Bank's Inflation Report, which provides a discussion of economic developments, meets this requirement, although a Report at quarterly frequency would be desirable to adequately inform the public.
(ii) "The Bank shall inform the public of the assessments on which monetary policy decisions are based" (Norges Bank Act, § 3, fourth paragraph). This is a 2003 amendment which entered into force on 1 January 2004. Monetary policy decisions are taken by the Executive Board at monetary policy meetings and a summary of their views is now provided in the expanded press release that announces the interest rate decision. A more extensive assessment is provided in the Strategy Document, but it only pertains to a four month horizon and not to individual monetary policy decisions. To fully meet this information requirement, Norges Bank should publish minutes of the monetary policy meetings held by the Executive Board.
(iii) "The Executive Board shall each year prepare an annual report [which is] sent to the Ministry [of Finance] for submission to the King and communication to the Storting" (Norges Bank Act, § 30, first and second paragraph). Clearly, the Bank complies with this requirement.
(iv) "Norges Bank shall regularly publish the assessments that form the basis for the implementation of monetary policy" (Regulation on Monetary Policy, 2001, § 2). It is not entirely clear what is meant here, but in the accompanying Guidelines for Economic Policy (Report no. 29 to the Storting, 2000-2001), it seems that the Ministry of Finance has in mind the Inflation Reports that are published three times a year, which the Ministry considers to be adequate for this purpose.
These formal disclosure requirements are very vague and insufficient to guarantee that the appropriateness of monetary policy actions can be properly assessed. In fact, based on the information published by the Bank we found it difficult to evaluate Norges Bank's monetary policy actions in 2003, as made clear in Chapter 4. It would have been particularly useful to have had access to inflation projections under alternative scenarios, especially for the exchange rate and wage growth, and to an
evaluation of the errors in the Bank’s economic projections. Nevertheless, our analysis has made clear that there is scope for considerable improvement in the internal decision-making process at Norges Bank. A better monetary policymaking process would likely have been more effective in reaching the Bank's inflation target.
This leaves us with a final accountability question. What consequences does Norges Bank face when its performance is left wanting?
Neither the Norges Bank Act nor the Regulation on Monetary Policy stipulate any procedures to hold Norges Bank accountable. Only the 2001 Guidelines for Economic Policy make any mention of what should happen if the inflation target is missed: "If inflation deviates significantly from the target over a period, Norges Bank shall set the interest rate with a view to returning gradually consumer price inflation to the target to avoid unnecessary fluctuations in output and employment".
Furthermore, in connection with the reporting requirement in the 2001 Regulation on Monetary Policy (§ 2), the Guidelines for Economic Policy state: “The Ministry expects Norges Bank to provide an assessment of any failure to reach the target established.” The Bank had already indicated that “[i]f there are significant deviations between actual price inflation and the target, the Bank will provide a thorough assessment in its annual report. Particular emphasis will be placed on any deviations outside the interval +/- 1 percentage point.” The Ministry added to this in its Guidelines that “[o]ther circumstances may also require such an assessment on occasions other than the annual report.” The Ministry of Finance referred to this in its letter to Norges Bank of 13 June 2003, which led to “Norges Bank's Report on Monetary Policy in 2003 - the first eight months.”21
A new development in accountability is that Norges Bank was invited for the first time to appear at a hearing before the Standing Committee on Finance and Economic Affairs of the Storting, which was held on 1 December 2003. Regular parliamentary hearings could be a good way of holding Norges Bank accountable, but this recent practice is not based on any legal requirement.
All in all, the legal accountability requirements of Norges Bank are very limited. In future Regulations on Monetary Policy or amendments to the Norges Bank Act, it would be desirable to strengthen the accountability of Norges Bank together with its independence. Regardless of the lack of formal accountability procedures, Norges Bank shall continue to be held accountable by Norges Bank Watch!
21 Interestingly, in its letter the Ministry also requests a more detailed account of the conduct of monetary policy for 2002, although the Annual Report 2002 was already published. We agree that the justification and evaluation of monetary policy in the 2002 Annual Report is not convincing.