at the time. this hardly suggests an abysmal forecasting record, nor that the bank has operated policy excessively firmly. on the contrary : overall, it suggests that the reserve bank has done its job well. as an aside, i don ’ t propose to comment in detail here on why we have had to have policy rather tighter in new zealand in recent years than has been necessary in australia. that matter has been dealt with in a good article in the bank ’ s quarterly bulletin not long ago. the key point is that we clearly experienced a conjunction of inflationary pressures, including quite strong increases in housing prices, in the mid - 1990s, whereas australia had a rather different experience. if inflationary pressures in the two countries converge, i have no doubt that in due course we will find that monetary conditions in the two countries will converge also. indeed, that seems to have happened to a considerable extent in recent months. but is it fair to suggest that the bank was slow to ease policy in response to the asian crisis, or to the drought? it is worth recalling that the present easing cycle began when our monetary policy statement was issued in december 1996. at that time, an easing, even the relatively moderate one which we indicated was appropriate, seemed a fairly bold move. inflation had been outside the top of the target band all year, the government had announced a major increase in government spending for the next three years, and a major reduction in income taxes, although deferred by a year, was within the period relevant to monetary policy. moreover, financial markets were much less confident than we were that inflation was trending down, and kept monetary conditions tighter than we felt was necessary almost constantly for more than the next four months. nobody, in new zealand or elsewhere, was predicting the asian crisis at that time, though it was at that time that monetary conditions relevant to economic activity in the first part of 1998 were determined. nobody, in new zealand or elsewhere, was predicting the drought at that time. throughout 1997, the reserve bank continued to ease monetary conditions gradually. during the first months of 1997, most of the easing took the form of lower interest rates. through the balance of the year, the easing took the form of a lower exchange rate, with interest rates somewhat firmer. but in interest - rate - equivalent terms, we sanctioned an easing of some 3 percentage points between december 1996 and 1997. and how reasonable was the assessment in the monetary policy statement we issued in december

) that central banks could perform their function best when given independent authority over policy. the consensus was based on the belief that the influence of elected politicians with their presumed short - term focus on re - election would bias monetary policy towards higher inflation. monetary policy should thus be delegated to an autonomous agency with a clearly defined objective of price stability. the delegation in turn was thought possible because monetary, fiscal and prudential policies were believed to operate separately, relying on their particular sets of instruments and exerting only limited influence on the other policy areas, hence requiring a minimum of coordination. for quite some time the consensus worked fine, seemingly vindicated by a long period of relatively stable output growth and low and stable inflation, which was labelled the great moderation. events since 2008 have disproved the idea of a neat separation of policies. prudential policy had been unable to prevent the occurrence of a massive financial crisis, possibly helped along by unintended side effects of monetary and fiscal policy. a key lesson of the crisis was then that in the absence of financial stability, monetary policy can be severely hampered and fiscal policy pushed off track. re - establishing financial stability in turn can come at a very high price ; and part of it may be achieved through emergency actions and balance sheet bis central bankers ’ speeches policy of the central bank, again blurring the separation lines between fiscal and monetary policy. using the central bank balance sheet a few years ago the balance sheets of central banks have been a barely noticed sideshow. the focus was on interest rate policy. today, with interest rates close to or at their lower bound and consequently hardly moving, attention has shifted to what happens in the balance sheets. after having been stable or growing steadily for years, balance sheets have expanded massively since the onset of the crisis ( figure 1 ). total assets and liabilities multiplied within a matter of months, rising in total by a factor of three in the case of the eurosystem, a factor of above four for the federal reserve system ( fed ) and close to five for the bank of england and the swiss national bank. in the euro area and switzerland the level has stabilized or even declined over the last year, while in the us and the uk the trend is still upwards. one reason for the expansion is that the balance sheet is the main ( if not the only ) remaining instrument of central banks when policy rates cannot be lowered further. in fact, however, balance sheet policy had already played a significant