depreciation. figure 2 new zealand ’ s real effective exchange rate while we recognise the pressures associated with exchange rate overshooting, there is little the bank can do to sustainably alleviate an overvalued real exchange rate, whether through monetary policy actions or the choice of exchange rate regime. new zealand has tried various exchange rate regimes over the past 40 years, including a fixed rate, crawling peg, and now a floating rate. we have found, however, that the choice of regime has had little impact on the medium - term level of the real effective exchange rate. past policy attempts to give the exchange rate more weight in monetary policy decisions tended to generate more interest rate volatility, with little lasting effect on the real exchange rate. instead, the appropriate policy response often lies elsewhere – for example, through measures to improve domestic saving, boost competiveness, and raise the growth rate of potential output. i will take up these points next. iv ) there are limits to what monetary policy can do : supportive structural and fiscal policies are also needed monetary policy can complement but not substitute for other policies that influence long - term economic performance, including growth, employment, and the real exchange rate. longterm growth is primarily a function of the economy ’ s structural characteristics and policies, including the quality and quantity of labour and capital inputs available to the economy, coupled with the productivity and innovation associated with their deployment. similarly, the bis central bankers ’ speeches level of employment over the long run reflects the characteristics of the labour market, including skill levels, productivity, and institutional practices. monetary policy cannot substitute for structural adjustment policies, nor can it deliver “ desired ” long term social equity, or distributional outcomes. such policy considerations often arise in respect of the housing market. by influencing mortgage rates and the demand for credit, monetary policy can affect the demand for housing and thereby help ease imbalances in the market while housing supply is increased. but monetary policy cannot free up more land constrained by zoning regulations, address procedural and pricing issues around planning consents, or raise productivity in the construction sector. fiscal policy also plays an important role in the economy ’ s long - term performance. for example, a constrained fiscal stance can help increase private saving, take pressure off interest rates and the exchange rate ; and provide the economy with a buffer against shocks by restraining the build - up of public debt. the stance of fiscal policy also affects inflation expectations and investor judgements as to the degree of coordination

the 20 years before the act, annual real gdp growth averaged 2. 2 percent while annual inflation was volatile around an average of 11. 4 percent. since 1990, annual inflation and real gdp growth have averaged 2. 3 and 2. 6 percent respectively and there has been a marked decline in inflation variability. figure 1 inflation and gdp growth ( annual ) bis central bankers ’ speeches international experience points in the same direction. we see this, for example, in the number of countries that now place the maintenance of low inflation at the core of their overall policy framework2. even in countries where central banks face multiple statutory objectives, the importance of the price stability goal as a precondition for reaching broader objectives is well accepted. ii ) low and stable inflation expectations increase monetary policy ’ s effectiveness like other central banks, the reserve bank pursues flexible inflation targeting. this approach has been reflected more explicitly through time in the policy targets agreements – notably by emphasising that, in pursuing its price stability objective, the bank “ should seek to avoid unnecessary instability in output, interest rates and the exchange rate ” ( included as of the 1999 pta ), and in specifying the inflation target as one to be met “ on average over the medium term ” ( included as of the 2002 pta. ) the effectiveness of monetary policy measures in influencing the short - term path of variables in the real economy is linked closely to policy credibility, which is reflected in the central bank ’ s record in achieving inflation goals and shaping expectations as to future inflation outcomes. stabilising and anchoring inflation expectations close to the price stability objective provides the central bank with greater freedom in addressing inflation shocks and scope to take policy actions that influence output and employment growth in the short term. this means that if economic shocks or a monetary policy action result in inflation moving outside its target range, wage and price setters will expect it to return to its target band within an acceptable period. without this credibility, such shocks and policy actions would lead mainly to variations in the rate of inflation – as we tended to see in new zealand in the past. this flexible, medium - term approach to policy was drawn on at the onset of the gfc, when the bank lowered the official cash rate ( ocr ) by 575 points in 2008 – 2009, even though headline inflation was initially well above the target band. by focusing on the medium - term inflation outlook, the policy stance was able to cushion the impact of the crisis. in a similar vein