the lags inherent in the operation of monetary policy, he argues that the essence of inflation targeting is a commitment to adjust policy to ensure that a credible or unbiased forecast of future inflation falls within the specified target. however we choose to define inflation targeting, it has certainly gained a very rapid acceptance around the world in a diverse range of countries. table 1 lists the countries currently engaged in formal inflation targeting, with interest growing rapidly at present. there are many variants in the approach, but the essential elements described above are common to all. table 1 inflation targets internationally country date adopted target target variable australia average of 2 - 3 % over the medium term ‘ underlying ’ pi up until october 1998 ; cpi thereafter canada february 1991 midpoint 2 % + 1 % band cpi finland * february 1993 2 % no explicit band cpi excluding indirect taxes, subsidies and housing - related costs new zealand april 1988 0 - 3 % 0 – 2 % originally cpi excluding interest spain * november 1994 2 % cpi sweden january 1993 midpoint 2 % + 1 % band cpi united kingdom october 1992 2. 5 % + 1 % reporting range retail price index excluding mortgage interest payments * now members of the euro area bernanke et al, 1999 svensson, 1997 nb. czech republic, republic of korea, israel, mexico and chile also describe themselves as inflation targeters, but not necessarily with explicit, public commitments to specific targets of the sort listed above. the evolution of the monetary policy framework it seems a decade is a long time in monetary policy. we have seen one full business cycle pass and that has been extensively reviewed, documented and analysed in recent reserve bank bulletins. while the reserve bank act has not changed in any significant respect, the way we go about “ doing ” monetary policy has changed over that time. the formal inflation target has been widened, the way we describe the targeted measure of inflation has shifted and our approach to dealing with the impact of external shocks or “ caveats ” has changed. in addition, a number of less formal innovations have occurred. under this heading i include the development, and subsequent demise, of the housing adjusted price index ( hapi ) ; the emergence of the “ underlying inflation ” concept, and its evolution into, effectively, the accountability measure for inflation performance before it was eased out of the limelight in 1997 ; the more recent extension of the policy horizon from around 4 quarters to the current 6 to 8 quarter timeframe ; and the shift in thinking about the role of

in international trade negotiations. the idea that we should reduce tariffs in new zealand no matter how stupid other countries are about raising theirs is incomprehensible to most of the public, and yet is an idea which would be accepted by almost all economists. of course we would be better off if other countries did not raise tariffs against our lamb, or our kiwifruit, or our butter, or our cheese, or our beef, or our fish. but even when they do raise such tariffs, it is not in our own interests to reciprocate in kind. economists know that, but have not done a terribly good job of helping the public to understand that. or take a third example. health care. i am certainly not going to step into the political maelstrom which is the health care debate, at least in part because i simply do not know what to suggest or recommend. but every economist knows from the days of economics 101 that if you offer to supply something for free, the demand for it will be enormous, and that if you don ’ t use price to limit that demand, you will soon be unable to meet the demand – whether you devote 6 per cent, 8 per cent, or 10 per cent of gdp to health care – and will be faced with long queues. in recent years, and contrary, i suspect, to public perception, government spending on health care has risen somewhat faster than gdp. ( in the year to march 1984, government spending on health care took 5. 6 per cent of gdp, while in the june 1999 year government spending on health care is estimated to have absorbed 6. 4 per cent of gdp. ) i simply do not know what proportion of gdp new zealand should be spending on health care. but i do know that, no matter how much is spent on health, there will always be queues unless price or some arbitrary political decision is part of the rationing process. of course queues may be an optimal way of dealing with the situation. as i said, i don ’ t want to enter the substance of this debate. all i am saying is that economists would do a service to rational discussion of health care if they made the nature of the issues clear. at the end of the day, what i am seeking from my professional colleagues is a greater commitment to assist in the formulation of economically sound policy. at the moment, politicians of all of the major political parties are hugely constrained by the fact that, while more