In undertaking the review, I have read the wide range of submissions provided to me and have met with a number of submitters and other interested parties. I visited New Zealand for two weeks in November 2000 in order to observe the operations of the Reserve Bank first hand and collect material for the review. I have also had discussions with a number of key people in the area of monetary policy from other countries. In order to judge whether the operation of monetary policy has been effective, it is important to understand what monetary policy can and cannot do.
People typically ask too much of monetary policy - no less in New Zealand than elsewhere.
In the long term, monetary policy can only control nominal variables such as inflation and the nominal exchange rate. It is beyond the capacity of any central bank to increase the average level or the growth rate of real variables such as GDP and employment, or to affect the average level of the real exchange rate. At best monetary policy can reduce the variability of these real variables somewhat. An attempt to increase the average level or growth rate of GDP or employment would trigger ever-rising inflation, at increasing cost to the economy in terms of less efficient resource allocation and arbitrary and inequitable redistributions of incomes and assets. For these reasons, an increasing number of countries have specified price stability as the primary goal for monetary policy.