policy. this analysis provides a useful case study on the use of inflation targeting in a small open economy, like new zealand ’ s. an analysis of the drivers of the business cycle was published in the bank ’ s march bulletin while a discussion of monetary policy over the business cycle will be published in the bank ’ s june bulletin in a few weeks. in summary, that analysis notes that the new zealand ’ s economy expanded from 1998 to 2007 and then had a six quarter recession in 2008 – 09. from 1998 to 2007 there were a number of significant shocks that determined the shape of the business cycle ( figure 2 ). first, there was a strong and unexpected increase in population growth from net immigration in 2002 / 03. second, there was a significant boost to the economy from a rising terms of trade from 2000, which accelerated late in the period. third, oil prices roughly doubled from mid2007 to mid - 2008. fourth, government spending rose rapidly from 2005. this came at a time of pre - existing excess demand in the economy. in new zealand, the inflation targeting framework is founded on the reserve bank act 1989 ( the act ) and the policy targets agreement ( pta ). the act makes price stability the primary function of monetary policy and gives the reserve bank independence in operating monetary policy, subject to an agreement between the minister of finance and the governor ( the sole decision maker ) specifying the functional target. the pta defines price stability in the form of an inflation target, currently future annual cpi inflation “... between 1 per cent and 3 per cent on average over the medium term ”. the pta says that in pursuing price stability monetary policy should “ seek to avoid unnecessary instability in output, interest rates and the exchange rate ”. for details of the dating for new zealand ’ s business cycles see hall, v b and c j mcdermott ( 2009 ) “ the new zealand business cycle ” econometric theory, 25, 1050 – 1069. bis central bankers ’ speeches figure 2 net permanent and long - term migration real dubai oil prices ( 1998 prices ) source : statistics new zealand source : reuters, haver analytics, rbnz calculation terms of trade government spending ( consumption plus investment, percent of annual gdp ) source : statistics new zealand source : statistics new zealand, rbnz calculations in setting monetary policy we had to take a view both on how these shocks would unfold and how they might change the inflationary pressure in the economy, as summarised

. and k. kiyota ( 2006 ), “ exports, fdi, and productivity : dynamic evidence from japanese firms ”, review of world economics, 142 ( 4 ), pp. 695 – 719 ; and arratibel, o., f. heinz, r. martin, m. przybyla, l. rawdanowicz, r. serafini and t. zumer ( 2007 ), “ determinants of growth in the central and eastern european eu member states – a production function approach ”, ecb occasional paper no 61. 10 see, for example, kee, h. l. ( 2015 ), “ local intermediate inputs and the shared supplier spillovers of foreign direct investment ”, journal of development economics, vol. 112, pp. 56 – 71. 14 / 16 bis central bankers'speeches 11 see, for example, bas, m. and v. strauss - kahn ( 2014 ), “ does importing more inputs raise exports? firm - level evidence from france ”, review of world economics, vol. 150 ( 2 ), pp. 241 – 275 ; and bustos, p. ( 2011 ), “ trade liberalization, exports, and technology upgrading : evidence on the impact of mercosur on argentinian firms ”, american economic review, vol. 101, no 1, pp. 304 – 340. 12 see chiacchio, f., k. gradeva and p. lopez - garcia ( 2018 ), “ the post - crisis tfp growth slowdown in cee countries : exploring the role of global value chains ”, ecb working paper no 2143. this research also suggests that sectoral tfp growth in cee countries depends roughly equally on technology creation at the global value chain frontier and on the ability of national firms to absorb the new technology. 13 see cœure, b. ( 2018 ), “ trade as an engine of growth : prospects and lessons for europe ”, speech at the nbrm high level international conference on monetary policy and asset management, skopje, 16 february. 14 see also cœure, b. ( 2018 ), “ monetary policy and climate change ”, speech at a conference on “ scaling up green finance : the role of central banks ”, organised by the network for greening the financial system, the deutsche bundesbank and the council on economic policies, berlin, 8 november. 15 see also united nations conference on trade