KEY POINTS:
Reserve Bank governor Alan Bollard has defended the monetary policy framework in the face of Government claims that it is not working as well as it used to.
Monetary policy could only do so much and had had to contend with some large and persistent shocks hitting the economy - housing and dairy booms and the biggest oil shock since the 1970s, he said.
"The next few years will not be easy but I believe the framework is the best available ... and has been relatively successful," Bollard said yesterday.
Earlier this month, Associate Finance Minister Trevor Mallard said the Reserve Bank Act, now 20 years old, had not worked as well in its second decade.
"Over recent years ... inflation has been driven by increased domestic demand that stems from a buoyant housing market, fuelled by cheap foreign capital attracted by a stable economy and relatively high interest rates," Mallard said.
"Now we have inflation challenges driven by record high international prices of food and oil. In both cases the tools available to the Reserve Bank have not been able to address those problems."
But Bollard said alternatives like targeting the money supply or the exchange rate had been tried before in New Zealand and elsewhere and found wanting.
"Another alternative that could appear superficially attractive is to require monetary policy to target multiple objectives such as growth, employment, export and the balance of payments. This was the approach taken in New Zealand and many other countries in the post-war period up to the early 1980s. It inevitably had a short-term focus, and resulted in stop-go policies and high inflation," he said.
The nearly quadrupling of oil prices over the past four years had left New Zealand poorer and we all needed to recognise this, he said.
"Even if we wanted to, we could not stop such prices rising. We need to allow the initial price changes to occur, but keep monetary policy firm enough to ensure that generalised second-round inflation effects do not take hold."
