Abstract :
Recently concerns have been raised in New
Zealand about the effectiveness of monetary
policy in controlling inflation while avoiding
damage to the economy from high exchange
rates. This review examines the basis for concern
and identifies the problem as a failure in
the primary instrument, namely the Reserve
Bank’s official cash rate, to adequately impact
further along the term structure curve, which
has become the more sensitive area for aggregate
demand. Direct control over expenditure
is therefore weak, and too much leeway is left
to the housing and other asset markets to sustain
demand in the economy. Globalisation of
credit availability and financial technology
have helped to blunt the policy instrument in
this respect, shifting the adjustment burden on
to the exchange rate. Deft management of interest
and currency expectations can help, but
the problem may require closer coordination
and cooperation between monetary and fiscal
policy, restoring a stabilisation role for the latter.
