Inflation Targeting Serves NZ Well
30 July 2008
New Zealand's inflation-targeting framework continues to serve the economy well, but we should be careful not to ask too much of it, Reserve Bank Governor Alan Bollard said today.
In a speech titled "Flexibility and the Limits to Inflation Targeting", Dr Bollard said inflation targeting is the best approach New Zealand and many other similar countries have yet found for monetary policy, among a limited number of viable alternatives.
"Of course, we continue to seek improvements. But overall, and even in the current very difficult circumstances, the flexible inflation targeting framework positions us well to manage the ongoing shocks impacting the New Zealand economy."
Dr Bollard said monetary policy works best in an environment where wider government policies promote economic stability. Together, they help maximise long-run growth performance and prosperity. But what is also needed is savings and investment behaviour geared towards growth.
"We look forward to findings of the Finance and Expenditure Select Committee's inquiry into the Future Monetary Policy Framework. We submitted that changes to tax and regulatory structures might help reduce their tendency to amplify economic cycles."
Dr Bollard said the New Zealand economy is subject to powerful forces and monetary policy can only do so much to buffer the shocks.
When shocks are persistent, as with oil and food prices currently, it is difficult to judge the appropriate response. …