The crisis and monetary policy: what we learned and where we are going

Inflation targeting is a monetary policy framework that was developed in response to the high inflation and macroeconomic instability of the 1970s and 1980s. Twenty years ago, New Zealand was the first country to formally adopt key elements of this approach – such as an explicit inflation target and various accountability and monitoring structures – in the Reserve Bank Act 1989. The framework has been durable, even as we’ve continued to learn how the economy works and continued to adapt and refine the way we do monetary policy. The past two decades have included one of the longest periods of growth that New Zealand has seen in decades, as well as droughts, migration shocks, terms of trade changes, an Asian crisis, a dot com boom and bust, and, most recently, the worst global economic and financial crisis seen in generations. This speech looks back over those two decades of inflation targeting to see what lessons we can draw from these experiences, as well as outlining some of the challenges ahead.