that change impacts your business will almost certainly be many weeks and probably many months. i have heard that some businesses believe that a change in the official cash rate can have an almost instantaneous impact in the market, because of the effect which such a change can have on confidence. but that is surely the exception rather than the rule. in most situations, the lag or delay between a change in monetary policy and the impact of that change on the economy is typically more than a year. to make life even more complicated, the lags are not only quite long but are also variable - they vary somewhat from situation to situation. this means that, if we had to offset the effect of, say, a world economic slowdown on the new zealand economy by easing monetary policy, we would need perfect ability to see the future for more than a year ahead, perfect understanding of precisely where the economy is now, and perfect understanding of how the economy works. well, we do our best, and i am fortunate to have some of the brightest economists in new zealand on my staff, trying to discern the future. we study 6, 000 data series. we look for relationships which look realistic in recent history. we talk to businesses up and down the country - about 50 or 60 before each quarterly monetary policy statement. we use some sophisticated economic models, but stir in very large amounts of judgement. we are constantly looking to update our assessment of the real economy outside the reserve bank ’ s doors. we get a steady flow of data relevant to new zealand from overseas economies. we believe we are as well - informed about the economy as any other organisation in new zealand, and better informed than most. but we can still get it wrong. let me illustrate. one of the most reliable relationships in recent economic history is that the world prices of the commodities new zealand exports tend to rise when the economies of our trading partners are buoyant, and tend to fall when the economies of our trading partners are subdued. that sounds pretty much what one might expect on the basis of common sense, and that is consistent with the data ( figure 9 ). figure 9 nz ’ s export partner growth and world commodity prices sources : rbnz, consensus, anz. figure 10 world export price index projections ( previous monetary policy statements ) source : rbnz. november 2001 is central projection. so since at least the december 2000 monetary policy statement, we have been expecting the prices of our commodity exports to decline ( figure 10 )

alan bollard : asset prices and monetary policy address by dr alan bollard, governor of the reserve bank of new zealand, to the canterbury employers ’ chamber of commerce, christchurch, 30 january 2004. * * * it has long been a tradition that reserve bank governors begin their year with a speech to the canterbury employers ’ chamber of commerce and because the economy of christchurch is focussed on exporting the topics picked have often been of particular interest to the tradable sector. given current concerns about the exchange rate, you may have expected a talk on that subject. however, i want to talk about something else - a topic which may seem more esoteric, but in particular circumstances can be very important. indeed, it is a topic that has been of considerable relevance to new zealand from time to time over the years. among central bankers right now one of the key topics of debate is whether monetary policy should actively seek to encourage asset price stability. the sharp end of this is whether monetary policy should seek to prevent or at least reduce asset price bubbles? this is exemplified by questions such as whether japan ’ s long - running recession and the us “ tech wreck ” could have been ameliorated by monetary policy constraining the events that preceded them. before going further, i should define my terms a bit. by an asset price i mean the price of something that one buys to generate income or to sell for a profit later. examples are physical assets - like housing, land, other buildings and collectables like paintings or exotic cars - and financial assets - like shares, bonds and other financial instruments. by consumer prices i means things one buys to consume, like milk, petrol, a visit to the doctor and ordinary cars. remember also that asset prices often behave more erratically than consumer prices, being slower to react to changes in supply and demand. prices of, for example, fruit and vegetables move constantly to match up buyers and sellers. asset prices are seldom that appealing in terms of classic economics. under the reserve bank ’ s policy targets agreement ( pta ) the bank is required to ensure price stability, as measured by the consumers price index ( cpi ), and, subject to this goal, to avoid unnecessary instability in output, interest rates and the exchange rate. asset prices are not included in the cpi. thus the question is should monetary policy sometimes look ahead of its normal time horizon and try to offset the potential damage down the track to consumer prices and economic stability that can