including new zealand. this is primarily driven by inward capital flows as investors search for higher yields around the globe. these capital inflows have led global bond yields lower – including in new zealand. the low imported interest rates have necessitated a variety of economic policy responses across many countries – including the lowering of central bank policy rates to stem the inflow, introducing macroprudential tools aimed at curbing excess lending, and purchasing foreign assets to slow down upward pressure on domestic currency values. at te putea matua we have undertaken the first two of these responses so as to continue to meet our inflation and employment mandate, as well as mitigate the risks of excessive debt / lending on broader financial stability ( e. g., the introduction and use of our loan - to - value ratios ). 14 the set of choices for te putea matua the reserve bank team is using international and domestic experience to assess the full suite of monetary policy tools available to new zealand. today we published a short document that outlines the framework we would follow if we had to use unconventional monetary policy tools. 15 publishing this framework provides greater transparency about how we might use these tools. this work is about being prepared for any range of potential eventualities, it is not a prediction of whether additional monetary policy tools will be needed. table 3 outlines the principles we would use to guide the use of the tools. for example, evgendis, a., & fasianos, a. ( 2019 ). ‘ monetary policy and wealth inequality in great britain : assessing the role of unconventional policies for a decade of household data ’. arxiv : 1912. 09702. colciago, a., samarina, a. & de hann, j. ( 2019 ). ‘ central bank policies and income and wealth inequality : a survey ’. journal of economic surveys, 0 ( 0 ), 1 - 33. rbnz webpage on the use of loan - to - value restrictions, https : / / www. rbnz. govt. nz / regulation - andsupervision / banks / macro - prudential - policy / loan - to - valuation - ratio - restrictions rbnz ( 2020 ). ‘ principles for using unconventional monetary policy in new zealand ’, https : / / www. rbnz. govt. nz / monetary - policy / unconventional - monetary - policy table 3 : principles for using unconventional monetary policy mpc remit principles effectiveness tools would be designed to provide a

well above its historical average since 1964. when the new zealand dollar is either high or low, it tends to remain high or low for longer than the exchange rates of other countries. so in the current situation, not only is it clear that the real exchange rate is high, it is also likely that this elevation will persist for some time. a relatively accessible example of the bank ’ s research on the exchange rate was a conference we held ( jointly with treasury ) earlier in the year. copies of all the papers from this conference are available at http : / / www. rbnz. govt. nz / research _ and _ publications / seminars _ and _ workshops / mar2013 / programme. html. on a trade weighted basis and against the major currencies involved in new zealand dollar transactions ( other than the australian dollar ), our exchange rate is currently in the top decile relative to historic experience. bis central bankers ’ speeches what are the drivers of the real exchange rate? we can think about what drivers the exchange rate in a couple of ways. one is the cyclical dimension of the exchange rate and the other is the long term level. the reserve bank has models that are able to explain a good proportion of cyclical fluctuations in the exchange rate. 3 these models typically highlight the correlation between the exchange rate and a few key variables, such as the terms of trade, interest rate differentials, relative house price inflation, and measures of risk. of course, one should never confuse these correlations as causal explanations of the exchange rate. figure 2 illustrates how the cyclical movements in the three most important variables used in one of these models can explain a large proportion of exchange rate fluctuations. 4 even though we can explain the cyclical movements in the exchange rate these movements may not be welcome by the tradables sector because, among other things, it adds uncertainty to decision making. that said, short term exchange rate volatility can be effectively countered through the use of forward exchange rate contracts, but it remains true that longer term exchange rate cycles are more difficult to handle for many exporting firms. for examples see mcdonald, c ( 2012 ) “ kiwi drivers – the new zealand dollar experience ” an 2012 / 02 and cassino e and z wallis ( 2010 ) “ the new zealand dollar through the global financial crisis ” rbnz bulletin september 2010. for specific details see mcdonald, c ( 2012 ) “ kiwi drivers – the new zealand dollar experience ” an 2012 / 02.