somewhat above a sustainable level, and inflation pushed to, and eventually slightly above, the top of the inflation target. we recognised that we had to pay more attention to the impact of interest rates, and this in turn caused us to start looking rather further into the future, in formulating policy, than had been necessary when we were primarily focused on the direct price effects of exchange rate movements ( most of which came through into consumer prices within two to four quarters ). in recent years, we have developed what we believe to be a sophisticated model of the new zealand economy which seeks to answer one question : given all we know about the structure of the economy, about the present state of the economy ( and in particular the gap between actual and potential output ), about the stance of fiscal policy, about wage behaviour, about prospects for the international economy ( clearly of huge importance for a small country like new zealand ), and so on, what are the monetary conditions required to deliver inflation to somewhere close to the middle part of our inflation target in six to eight quarters ’ time? nobody pretends that that is an easy question to answer, or that our model is flawless, but it seems to us that that is the right question. note that i referred to the ‘ monetary conditions required to deliver inflation to somewhere close to the middle part of our inflation target in six to eight quarters ’ time ’. the reference to monetary conditions rather than to interest rates is a recognition that, in a small open economy, as i have already mentioned, a central bank committed to delivering price stability has to be concerned with what is happening to the exchange rate, and not just what is happening to interest rates, since both affect inflation. ( unfortunately, too much of the academic literature on monetary policy has been written by economists in the united states, an economy where, because of the relatively small share of international trade, the exchange rate can be, and has been, largely ignored in thinking about monetary policy issues. ) but the reference to delivering inflation to ‘ somewhere close to the middle part of our inflation target in six to eight quarters ’ time ’ is a recognition that what we should be mainly concerned about is not the direct price effects of movements in the exchange rate but rather the longer term effects which arise out of the way in which changes in the exchange rate affect the demand for goods and services produced locally. thus, for example, a depreciation in the exchange rate will have two kinds of effects on local prices. first,

bond market can be left for a while to digest its previous meals ; but that does not remove the necessity to stay on the agreed fiscal path : the new lenders – partners though they are – also need to be convinced of ireland ’ s societal capacity for the fiscal adjustment essential to bring the debt dynamics under control. besides, a slower adjustment would add to the stock of debt, and worsen the long - term prospects of the economy. the eu - imf programme adds external credibility to the fiscal programme and should provide assurance that the adjustment is feasible regardless of any differences of opinion on the likely macroeconomic growth rates. i don ’ t have time to elaborate today on the importance of restoring cost competitiveness if ireland is to resume exploiting its traditional potential in international markets and more generally in reducing the risks to jobs. remember that the sustainable job growth of the nineties was predicated on wage restraint delivered by the social partnership process. there has already been a deal of adjustment, especially in the public sector. but it ’ s not easy to see bis central bankers ’ speeches how rapid job growth can be assured if wage costs are not rolled back on a broader basis from their unsustainable run - up in the early 2000s. the process of rolling back the excesses that have marred the great advances made by the irish economy over the past two decades has heightened uncertainty. in order to underpin a vigorous economic recovery, risk must be reduced, not least by ensuring the conventional elements of fiscal discipline and cost competitiveness, but also through an intensified process of clarifying and crystallizing the position of the banks and reducing their exposure. the eu - imf programme funding provides the window of time in which to restore the fundamentals and reduce the risks. let me end on a more philosophical note. if the previous decade had emphasized individual endeavour in a globalized economy, the last couple of years has revealed the degree of interdependence which still exists both in the domestic economy – where the excesses and failures of some have influenced all – and between different national governments – as when fiscal pressures spill over from one country to the rest of the euro area, for example. despite the scale of the official financial support provided by eu partners and the imf, in the end it is evidently going to be for ireland to bear and sort out the consequences of these failures. accordingly the national response must be one that achieves a broad buy - in which requires among other things not only fairness,