as long as the bank continues to be open and honest. what about the rising exchange rate? the only other point i would like to touch on briefly relates to the sudden strengthening of the new zealand dollar over the last few weeks. since 23 september, when the new zealand dollar reached 0. 492 against the us dollar, the kiwi has strengthened against the us dollar by nearly 9 per cent ( as of late 19 october ). this is pretty dramatic stuff, and the appreciation has clearly worried some exporters who fear it may be the beginning of a new period of strong exchange rate appreciation. indeed, the meat and wool economic service of new zealand has estimated, presumably on the assumption that no forward exchange cover has been taken at lower exchange rates and that the appreciation is not soon reversed, that a 10 per cent rise in the exchange rate would see farmers ’ returns on lamb drop by 17 per cent, on beef by 14 per cent, and on wool by 12 per cent. i am bound to say that the present mix of monetary conditions is not one, which makes me terribly enthusiastic. given the propensity of us new zealanders to borrow as soon as cash - flow constraints allow i worry that at present levels interest rates have become undesirably low. i certainly don ’ t see much evidence that, at these lower interest rates, new zealanders will be rushing to increase their savings in order to fund our on - going appetite for borrowing. even at the higher interest rates which prevailed earlier in the year - allegedly the highest real interest rates in the developed world - new zealanders were enthusiastic borrowers and reluctant savers, at least in fixed - interest form, suggesting that, whatever the arithmetical calculation implied about real interest rates, most new zealanders did not perceive interest rates as particularly high in real terms. certainly, our real interest rates are not out of line with those in similar countries today. in any case, i have long ago had to face the fact that central banks have very limited ability to affect the mix of monetary conditions. to be sure, we could push up interest rates, but only at the cost of putting still further upward pressure on the exchange rate. i know of no way in which the reserve bank can both reduce the exchange rate and increase interest rates. ( of course, we could ease monetary policy further, thereby reducing both interest rates and, presumably, the exchange rate, but the appropriate level of monetary conditions is something which we have to judge in the

. so too are other inflation targeting central banks. context these are awkward times for small, open economies as they struggle to find monetary and financial structures that will facilitate growth, prosperity and stability in a world characterised by increasing openness to trade and capital flows and, it seems, increasing volatility. the events of 1997 and 1998 demonstrated how rapidly stresses in one economy can be transmitted to others. they also underlined just how important are strong institutions, strong balance sheets - in both the public and the private sector - and strong risk management practices to ensuring robustness in the face of shocks. dr grenville, our next speaker, will deal with the issues of inflation targeting in a world of volatile capital flows. i see that as a key component of our discussions today because we know that we have to be able to devise structures that enable us to live in such a world. the evolution towards more open capital accounts and greater capital mobility is being driven largely by technological developments. those new technologies bring us all enormous advantages and are fuelling extraordinary growth internationally. the challenge we all face is how to gain the advantages of the new technologies without being swamped by their other consequences - such as the enhanced mobility of capital, of goods, ideas, skills, people and resources generally. amongst other things, this requires us to find institutional and policy structures that enable us to take advantage of the new technologies while acquiring the flexibility to adapt rapidly and without undue stress to new developments and shocks. the institutional structure employed for the conduct of monetary policy is just one of the factors that policymakers need consider in thinking about these issues. trade policy, prudential regulation, accounting and audit standards, legal structures and bankruptcy provisions - amongst other elements of policy - are all very important and should not be overlooked in the design of robust institutional frameworks. but today we are here to consider just monetary policy. what is inflation targeting? first, a couple of definitional points to help locate the discussion we will be engaging in over the rest of the day. what is inflation targeting? a substantial study of inflation targeting was published in 1999 by ben bernanke, thomas laubach, rick mishkin and adam posen. 1 in their book, they described it in the following way : “ inflation targeting is a framework for monetary policy characterised by the public announcement of official quantitative targets ( or target ranges ) for the inflation rate over one or more time horizons, and by explicit acknowledgement that low, stable inflation is