most likely outcome in new zealand, it can ’ t be ruled out. this is not a prediction, just a statistical observation outlining the challenges of setting monetary policy. an inability to predict what might happen next is no excuse for not preparing for what could happen. that ’ s true for businesses, governments and central banks. it is in light of both economic theory and recent global experience that we have been assessing what alternative monetary policy tools may be available to the reserve bank of new zealand – and their relative desirability. we are fortunate, unlike many other oecd economies, to have the time to prepare for such possible needs. the work we have been pursuing has involved : • identifying the suite of possible ‘ unconventional monetary policy tools ’ available to us ; • defining and making explicit the criteria we would assess these tools with, against both each other and also alternative policies all together ( e. g., fiscal policy options ) ; • considering the relative benefits and costs of the tools, so as to operate on a ‘ least surprise ’ basis, and to ensure we are working in collaboration and with the agreement of the fiscal authorities ; • considering not just the monetary policy efficacy of the tools, but also broader considerations related to our financial stability and efficiency mandate ; and • ensuring the tools are actually able to be utilised, including working with the important financial institutions that make up our system. recent international experience our work, outlined later, has been informed by much research and recent experience internationally, which has highlighted desirable and less desirable ( sometimes unanticipated ) outcomes. there are consequences of using monetary policy – conventional and unconventional – with different impacts on different people ( e. g., savers versus borrowers ). these consequences can become more significant the longer interest rates remain low. evidence on the side - effects of unconventional monetary policy is emerging slowly and is sometimes inconclusive. what is certain is that the use of unconventional policy puts the spotlight on the central bank. first, there are implementation questions around the selection of tools and their use. for example, large scale asset purchases introduce the central bank into more targeted ‘ picking winners ’ compared to the blunt interest rate instrument. we need to assess which assets are up for sale to the central bank and why. borrowers and savers continue to be impacted differently as per conventional monetary policy, however the choice of which assets to purchase significantly impacts specific parts of the financial markets and sectors of society. the selection criteria for specific assets also

needs to be clear. there is a choice to be made between public or private assets, and then which assets. as an example, there has recently been increasing discussion of favouring ‘ green ’ bonds over other bonds. second, central banks have also recently bought assets that have a long duration. even if they stopped now, the assets will sit on the central bank balance sheets for a long time to come unless sold before maturity. some of the assets may become impaired while the central bank owns them, creating market and credit risk for the central banks ’ balance sheets. third, central bank balance sheets ( which are effectively the government ’ s balance sheet ) have expanded greatly with the purchased assets and issued liabilities ( see table 2 for the scale of central bank asset purchases as a proportion of gdp ). the persistence of these purchase programmes has also been far longer than anticipated at their outset, given the ongoing low inflation pressures. the marginal impact on interest rates of new purchases is now reducing in some countries. fourth, while targeted direct intervention is often positive for specific market functioning, the unprecedented growth in central banks ’ balance sheets can also have unintended detrimental impacts. 11 some challenging factors include the scarcity of bonds available for investors to buy, squeezed liquidity in some asset markets, and fewer market operators actively trading. fifth, a possibly unsurprising outcome of persistently low global interest rates and the use of unconventional monetary policy tools has been rising asset prices. this outcome has meant increased wealth for some, e. g., home owners and equity investors ( figure 5 ). figure 5 : global asset prices index new zealand advanced economies index china houses shares 2019 2011 source : oecd, real estate institute of new zealand, rbnz. note : house prices for oecd members serve as a proxy for advanced economies. bis ( 2019 ). ‘ large central bank balance sheets and market functioning ’. market committee papers, october 2019. however, the overall impact of unconventional monetary policy on wider wealth and income equality is currently unclear. some studies find that unconventional monetary policy, particularly large scale asset purchases, increase inequality more significantly than conventional monetary policy. 12 other studies find the unconventional policies have had a limited or positive impact on reducing income inequality, e. g., by supporting the income of low income families by supporting employment. 13 these possible effects need to be considered in the context of broader fiscal policy settings. finally, there has been significant spill - over effects to other smaller open economies