fully employed and price stability is achieved. the output gap reflects the difference between the level of output in the economy and potential output and, as such, indicates the degree of excess capacity or capacity constraints in the economy and the implications for inflationary pressures. we regard the neutral interest rate as the policy rate consistent with the economy growing at its potential in the medium term and having inflation expectations matching the price stability objective. in the us the 1973 - 5, 1981 - 2, and 1990 - 91 recessions were triggered to a significant extent by sharp rises in oil prices in 1973 ( opeci ), 1979 ( opec2 ) and 1990 ( iraqi invasion of kuwait ). the 2001 recession was related to the collapse of the high - tech bubble, and the 2008 - 9 recession was due to the range of financial market and regulator factors that led to the gfc. i. e. an increase in the use of temporary labour and contractors for short - term engagements. flexible inflation targeting involves assigning the central bank the explicit goal of maintaining inflation in a range of consistent with overall price stability, giving the central bank the independence to pursue that goal and holding it accountable for reaching the price stability objective. around 30 countries have adopted flexible inflation targeting. see for example https : / / www. rbnz. govt. nz / / media / reservebank / files / publications / discussion % 20papers / 2016 / dp16 - 07. pdf

this includes the arrangements for handling the balance sheet implications of unconventional tools. more fundamentally, we also need to ensure we can coordinate an appropriate mix of fiscal and monetary policy responses if so desired. • what additional policy responses might we need to consider to manage some of the consequences of low interest rates and market functioning? we could consider additional macroprudential tools and specific market interventions to ensure liquidity and credit flows. but we need to assess how best we communicate to all participating in the new zealand economy as to the purpose of our actions, and our desired outcomes. new zealanders have become used to the terminology associated with our current monetary policy activities. a low ocr is understood for its intent and implications on borrowing and lending rates and, in part, the level of the nz dollar exchange rate. we need to outline how we could best translate activity in, for example, the interest rate swap market or asset purchases, into meaningful concepts for all. we need a meaningful ‘ shadow ’ ocr concept for ease of discussion. to ensure they operate effectively and efficiently, we also want to ensure market participants ( e. g. banks and payments operators ) can respond appropriately to the use of unconventional monetary policy tools. while we have done a lot of this preparatory work, we have more to do. these considerations are all well advanced, and we continue to speak with relevant decision makers, market participants, and technical experts over time. any deployment of unconventional monetary policy tools will depend on the prevailing economic conditions, the functioning of the financial system, and the efficiency of the various monetary policy channels. this leads us to currently favour a baseline decision set for the purposes of cyclical demand management, assuming it is needed and superior to alternative policy responses, of : • • • • • • lowering the ocr ; using forward guidance ; using mildly negative interest rates if more stimulus was needed ; considering the use of interest rate swaps to reduce interest rates for new zealanders, considering asset purchases ( e. g., government bonds ) for further impact ; and utilising a combination of all of the above, as needed. we could also introduce term lending activities if the above combined actions proved insufficient and if retail banks are not passing on the very low rates to customers. foreign asset purchases could also be useful if a specific economic shock was from offshore and resulted in an overvalued nz dollar. the underlying principle is that we would choose the most appropriate tool or combination of tools, and policy coordination, for