mr. sherwin considers growth, productivity and monetary policy : the longer - term perspective address by the deputy governor of the reserve bank of new zealand, mr. murray sherwin, to the annual conference of the new zealand forest owners association in auckland on 12 / 11 / 97. introduction : competitiveness and productivity i have been asked to discuss the new zealand economy in a medium - term context, with particular reference to the place of forestry. i am conscious also of the overall theme of this conference - - the competition gap. i applaud the association for choosing to focus on that theme, because while that is clearly a very relevant issue for the forestry sector to be debating, it is equally relevant to the broader economy. we all wish to raise living standards in new zealand. the reform effort of the past 13 years has been focused on precisely that goal. to achieve it, we require a sustained lift in productivity, across the new zealand economy. improved productivity and “ meeting the competition gap ” are one and the same thing. it is not my intention to provide a substantive projection of new zealand ’ s economic prospects over the growth cycle of a gf17 pine tree. nor do i intend to discuss the likely prospects of the forestry sector. rather, i will try to lay out a few of the very broad factors that will shape the development of the new zealand economy over the medium term, and to reflect a little on the factors that influence interest rates and exchange rates over longer time horizons. the determinants of economic growth last month, governor don brash delivered a speech to the auckland rotary club under the topic “ how fast can the new zealand economy grow? ” the key theme of that speech was that our growth potential is determined ultimately by quantities and quality. the quantity of people and the quantity of capital - - in the form of factories, forests, trucks, roads, computers and all the tools of a modern economy. and the quality of those same inputs - - how well they work, and how efficiently they are deployed. as dr. brash went on to say, the reserve bank believes that new zealand ’ s longer - term growth potential is probably of the order of 3 percent annually at present - - a result of a trend growth in the working age population of around 1. 5 percent and trend growth in output per person, or productivity, also of around 1. 5 percent. lifting that growth potential requires bigger quantities or better qualities - - of people, attitudes, and equipment

do about that, and there is nothing the government or the reserve bank can do about that. we live in a world of floating exchange rates. while it is conceivable that we could fix our exchange rate to the us dollar, or the australian dollar, or even the twi ( as we once did ) we can ’ t fix to all simultaneously. inevitably we have to learn to cope with exchange rate variability. in fact, on measures of shorter - term exchange rate volatility, the new zealand dollar is a surprisingly good performer. day - to - day volatility of our currency is modest when measured alongside the experience of other developed countries - - even those much larger than new zealand. to assess the impact of longer - term exchange rate trends, we need to look to measures of the “ real ” or inflation - adjusted exchange rate - - because that is what matters for exporters. on that basis, we find that the new zealand dollar moves through the inevitable cycles, but will typically be found within about 15 percent to 20 percent of its longer - term average. our recent experience has been consistent with that. the real twi was around 10 percent below its long - term average at its last trough in 1992. at its recent peak, in april of this year, it was around 17 percent above that same longer - term average. while cycles in the real exchange rate of that amplitude can certainly create discomfort for exporters, it is clear that they are well within the range experienced by other currencies. in essence, exporters should be factoring cycles of that sort into their business planning. it is clearly relevant to the variability of their future earnings stream, and therefore, to the value of their assets and to the nature of the capital structure they require to stay in business. of course, it is also relevant to their balance sheet management and to risk - hedging strategies they may need to adopt. the best contribution that governments and central banks can make to moderating real exchange rate cycles is to embrace policy consistency and transparency - - in monetary policy, fiscal policy, and in tax and regulatory policies. the decline in exchange rate volatility in recent years provides some evidence to support that. one point we should all be clear on. there is no future in thinking we can pursue competitiveness, in forestry or any other sector, through attempts to use monetary policy to engineer a weaker exchange rate. i say that for several reasons : • competitiveness and the productivity