##lmination of various strands of economic thought and the principles that were underpinning the wider reform of new zealand ’ s public sector at the time. 5, 6 at its core, the framework that emerged provided the bank with a means to establish credibility that we would bring inflation down and keep it there. 3 see for example friedman ( 1984 ) and friedman ( 1990 ). 4 then reserve bank governor spencer russell ( 1984 ) discussed the new government ’ s commitment to bring inflation under control : “ we have had periods of tight monetary policy in the past. but by backing off at the eleventh hour, money and credit growth rates have been allowed to expand excessively again and the benefits from the temporary period of tightness have been lost. the government has made it clear this will not be the case again ”. 5 reddell ( 1999 ) contains a detailed discussion of the origins and early development of the inflation target ; grimes ( 1996 ) also provides a comprehensive summary of monetary policy developments within the wider reform environment. 6 don brash, who was the first governor of the inflation - targeting era, once said of the origins of inflation targeting in new zealand “ i will simply note that history can be surprisingly confusing, even for those who were there ” ( brash, 1998 ). ref # 7482042 v2. 2 and why does credibility matter? if policymakers are able to convince firms and workers that they will set policy to achieve the inflation target, this anchoring of inflation expectations makes it more likely that prices and wages will be set in a manner consistent with the target, even in the face of shocks to the economy. this naturally makes the target itself easier to achieve. picture the new zealand inflation - targeting framework as a newly - planted tree. in the 1970s and 1980s, several seedlings of low inflation had been planted, but none took hold. the ground conditions – a highly regulated financial market and economy – were not conducive to growth, and the winds of politics kept blowing the seeds of low - inflation away before they had a chance to flourish. by the mid - 1980s, ground conditions were much improved. new zealand had gone through a dramatic period of financial market reform in the nine months between july 1984 and march 1985. the float of the new zealand dollar and the commitment of the government to fund the fiscal deficit via issuance of public debt to the private sector freed up the bank to pursue domestic monetary policy ( kamber et al., 2015 ). to

in new zealand. although they have different objectives, our macroprudential policies were complementary to monetary policy when first introduced ; the lvr restrictions were acting to reduce growth in house prices at a time when the bank expected inflationary pressures to build ( see williams, 2017a ). but as the outlook for inflation weakened, the policies began to have opposing implications for the business cycle. the pta is clear that monetary policy must have regard to financial stability but it does not – and probably cannot – specify exactly what trade - offs should be entertained. the optimal balance between price and financial stability remains an area of ongoing research in new zealand and abroad. 19 an explicit reference to the target midpoint was also incorporated into the 2012 pta, so that it now read “ keep future cpi inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint ”. this was motivated by the desire to anchor inflation expectations more firmly to 2 per cent, as they had been close to the upper end of the target band for most of the inflation targeting period ( kendall and ng, 2013 ). in recent years, inflation in new zealand has been persistently low, as in many countries around the world. we have undertaken a great deal of research to better understand why this has been the case, and what characteristics of this expansion have differed from expansions before it ( see williams, 2017b, for a summary of this work ). some features have simply been revealed with the passage of time, and some reflect our evolving understanding of how the economy operates. but we have not found any features that imply that the framework itself should be revolutionised – that the bank has been confronted with new developments is an unavoidable fact of life, not just monetary policy. 20 where to from here? the next stage in our evolution our increasingly flexible approach to inflation targeting outlined above has been made possible by the achievement and maintenance of credibility regarding our framework. there are two key aspects of the framework – two of our stakes in the ground – that remain as important today as they were in 1989. these are operational independence and transparency. 21 changes to the pta have tended to reflect actual bank practice at the time, but have also often been initiated by the government of the day. the bank has seen several government reviews of its framework, often in response to macroeconomic developments. and this is 18 see for example rogers (