us that property investment is the best way of ‘ protecting you against inflation ’, to say nothing of making the most effective use of the tax system. even if we are not familiar with the detail of the statistics, we know that in recent years residential property prices have risen hugely in much of the country, most obviously in auckland. according to reinz data, the median price of house sales in the auckland district rose by 53 percent over the three years to december 1996, by 36 percent in the southland district ( including queenstown ), and by 29 percent in the waikato / bay of plenty district. even rural land prices, which have come back markedly in some areas in recent months, rose by 45 percent over the three years to the first half of 1996, according to valuation new zealand data. is it any wonder therefore that new zealanders who claim to believe that consumer price inflation is more or less under control continue to borrow money enthusiastically at 9, 10, and 11 percent to acquire property? lest there be any misunderstanding, i am assuredly not against investing in property, let alone against home ownership. i own a home and a small amount of other property myself. i am merely saying that inflationary expectations are alive and well in the minds of most new zealanders and that, until that situation changes, we will inevitably be looking at interest rates which look high in comparison to current consumer price inflation. conversely, of course, as inflationary expectations abate, and particularly as expectations of property price inflation abate, the overall level of interest rates will tend to be lower also. alan greenspan, chairman of the us central bank, has on several occasions suggested that price stability obtains when economic agents - businesses and private individuals - no longer take account of the prospective change in the general price level in their economic decision - making. it is clear that we still have a little way to go. what about new zealanders ’ expectations for economic growth? are these too quite unrealistic? i believe that they are, at least based on current policies and attitudes. in the early 1990s, new zealand achieved real economic growth of more than 5 percent per annum for two years in succession. we were told that we were growing faster than any other oecd economy, and at growth rates comparable to those achieved by the east asian ‘ tiger ’ economies. we began to believe that, as a result of the economic reforms of the last decade, we too were capable of 5 or 6 percent growth

zero, it is helpful if inflation is some low positive number to make negative real interest rates possible. the second school of thought argues for a lower inflation target, often characterised by 0 to 2 percent but sometimes expressed as the level of average prices remaining stable over time. those who favour this view discount the arguments advanced by the ‘ low positive ’ school. they acknowledge that there is an upward bias in the way in which inflation is measured, but argue that in most countries outside the united states that bias is almost certainly less than 1 percent and certainly could not justify a target with a mid - point of 2 percent. ( the new zealand government statistician is strongly convinced that there is less bias in the measurement of the new zealand cpi than there is in the measurement of the us cpi. ) they acknowledge that it has not been easy to adjust nominal wages downwards in recent years, but argue that in substantial part that is a result of the persistently high inflation most countries have experienced in recent decades, so that that should be no more than a transitional problem. moreover, even though it may be difficult to reduce the wages of an individual employee, that does not prevent a significant reduction in unit labour costs as a result both of unchanged wages and positive productivity, and of natural turnover in the labour force. critics of the ‘ low positive ’ school challenge the assertion that monetary policy occasionally needs to reduce real interest rates below zero, and note other ways in which monetary policy can stimulate demand, particularly in very open economies where movements in the exchange rate play an important role in influencing aggregate demand in the short term. those favouring very low inflation ( 0 to 2 percent ) argue that not only are there no advantages in tolerating a ‘ low positive ’ rate of inflation there are also significant disadvantages of even quite low rates of inflation. thus for example martin feldstein of harvard university ( and current president of the national bureau of economic research in the us ) argues strongly that even very low levels of inflation significantly exacerbate the biases in the tax system which encourage consumption, discourage saving, and encourage excessive investment in residential property. in a recent paper he argued that reducing measured inflation from 3 percent to 1 percent in the united states would result in a permanent increase in the level of us gdp of 1 percent, a very large gain in economic well - being even if there is some temporary loss of output required to reduce inflation to that level. others have also argued that the interaction between inflation on the one