macro - prudential policy, subject to consultation with government. see reserve bank financial stability reports ; bollard ( 2011 ) “ where we are going with macro and microprudential policies in new zealand ”, speech to the basel iii conference, sydney ; ha & hodgetts “ macro - prudential instruments for new zealand : a preliminary assessment ”, reserve bank of new zealand workshop on macro - prudential policy ; spencer ( 2010 ), ” the reserve bank and macro - financial stability ”, reserve bank of new zealand bulletin 73 ( 2 ). as used to calculate risk weighted assets under the basel capital adequacy regime bis central bankers ’ speeches the natural question arises : how will macro - prudential policy interact with the reserve bank ’ s independent monetary policy mandate? the first point to make is that macro - prudential policy will have an important influence on monetary policy, in a similar way to fiscal policy, for example. thus if macro - prudential policy is acting to dampen aggregate credit and demand, there should be less work for monetary policy to do ( figure 4 ). because of this potential assistance from macro - prudential policy, there may well be situations where monetary policy seeks the support of macro - prudential policy, just as it may seek the support of fiscal policy ( section 10 of rbnz act ). but macro - prudential can only be used to assist monetary policy if it is also consistent with its primary financial stability objective. figure 4 essential monetary and macro - prudential policy interactions source : rbnz an important point to note here is that, like fiscal policy, macro - prudential policy is likely to be on a slower time schedule than monetary policy. changes in the counter - cyclical capital buffer, for example, will require six to twelve months notice for the banks to comply. thus, while we will try to ensure that macro - prudential policy is consistent with monetary policy objectives, these policy settings are less amenable to fine tuning. in that sense, macro - prudential policy is likely to be taken as a background “ given ” when it comes to making short term monetary policy decisions. the final point i must emphasise is that macro - prudential policy cannot replace monetary policy. while macro - prudential can hopefully assist monetary policy, it will never be as powerful or as flexible an instrument as the official cash rate ( ocr ). further experience will

its members. ” i will quote eichengreen at length, largely because i find his analysis and assessment as persuasive as any i have encountered on this subject – which is another way of saying that for the most part i agree with him. i am particularly attracted to his dismissal of the more ambitious reform proposals, including those sponsored by some g7 governments, as unworthy of much discussion simply because “ they have not a snowball ’ s chance in hell of being implemented. they all assume a degree of intellectual consensus and political will that simply does not exist. ” eichengreen goes on to list a set of key assumptions that condition his thinking on these issues. those also bear repeating : • liberalized financial markets have compelling benefits. this is an argument about savings mobilization, and efficient allocation of investment, together with the benefits of allowing consumption smoothing and risk diversification. note that it is not a closed - minded piece of ideology, but a proposition that, despite their obvious weaknesses, markets generally do a better job of allocating resources than do governments. • international financial liberalization and growing international capital flows are largely inevitable and irreversible. at the core of the global trend towards financial liberalization lie changes in information and communications technology. this rapidly emerging and pervasive technological capability makes it more difficult to restrict the range of financial transactions in which market participants engage. as the technology becomes more pervasive, and the benefits from accessing it expand, so too the costs associated with constraints on its use must grow. moreover, it is difficult to limit international financial transactions when domestic financial transactions are being freed. given that the case for domestic capital market liberalisation is overwhelming, it follows that it will be increasingly difficult and costly to limit international financial transactions. • notwithstanding the manifest benefits of financial liberalisation, capital markets do not work perfectly ; they are characterised by information asymmetries that give rise to sharp corrections and, in the worst case, financial crises. here, eichengreen recognises that there are characteristics of financial markets that make them prone to occasional distress, to overshooting and to herd behaviour. the banking system will often be the point at which stresses associated with this behaviour come to the surface. so, however positively we view markets, history and the structure of financial markets warns us to expect periodic crises. • this instability provides a compelling argument for erecting a financial safety net, despite the moral hazard that may result. eicheng