. this, in turn, means that the bank is able to respond to economic shocks by adjusting interest rates less than would otherwise be the case. several studies find benefits from transparency in terms of reduced volatility of interest rates and smaller movements in market rates for a given change in central bank actions ( e. g. see blinder, 2008 ). along similar lines, drew and karagedikli ( 2008 ) demonstrated that new zealand ’ s short - term interest rates move more predictably and long - term interest rates and inflation expectations are more stable in association with greater transparency. thornton ( 2002 ) argues this is the most critical reason for, and form of, transparency. bis central bankers ’ speeches 2014 marks 25 years since our inflation targeting regime was introduced – and over 20 years since low inflation was accomplished. pretty much a whole generation of new zealanders has not had to experience the distortions and inequities of high inflation that characterised the 1970s and 1980s. when seeking to build understanding of monetary policy goals and its operation, we also need to communicate the costs and benefits of proposals to change the framework around monetary policy. an example is the debate around the exchange rate and its relationship to monetary policy. the bank has conducted research, published analysis and, together with the treasury, convened a conference towards understanding of monetary policy and the exchange rate. assistant governor john mcdermott recently gave a speech summarising the findings of this work ( mcdermott, 2013 ). the third and most potent rationale for transparency is to use communication as a fundamental tool for signalling a monetary policy action. in this context, statements and analysis by the bank are designed to inform and shape expectations about future monetary policy settings. indeed, when used in this instrumental manner, the words of the central bank are themselves monetary policy actions ( see holmes, 2009 ). achieving this impact requires considerable central bank credibility. the institution needs to be perceived as a responsible and credible manager of its designated policy goals in order to successfully influence economic behaviour. as janet yellen, president obama ’ s nominee as next chair of the us federal reserve board of governors said : if the fed ’ s communication is “ to have its maximum effect, it must be understood and believed ” ( yellen, 2012, p. 7 ; my emphasis ). one test in this respect is whether our statements yield the market responses we seek. the potency of words is also their danger. market sensitivity to language is acute, and it is important to avoid

in service to society new zealand ’ s revised monetary policy framework and the imperative for institutional change a speech delivered at wharewaka function centre, wellington, new zealand on 29 march 2019 by adrian orr, governor written with omar aziz, economic advisor 2 the terrace, po box 2498, wellington 6140, new zealand telephone 64 4 472 2029 online at www. rbnz. govt. nz introduction tena koutou katoa. thank you for joining us today to discuss new zealand ’ s new monetary policy framework. the recent amendment to the reserve bank ’ s legislation sets up a monetary policy committee that is responsible for a new dual mandate of keeping consumer price inflation low and stable, and supporting maximum sustainable employment. the committee ’ s deliberation process will ensure that all decisions benefit from a diverse range of views, and offer greater transparency and accountability to monetary policy decisionmaking. before i outline the features of the new framework and its underlying principles, i would like to paint the backdrop to this institutional change. the business of central banking is evolving as circumstances change. some of the change is favourable, some is confronting. on the favourable side, we have low and stable inflation, low unemployment, and broad financial stability. this advantageous position must never be taken for granted. i thank all of the wise people – past and present – who have worked hard on creating the current environment. on the challenging side, in addition to maintaining the status quo, we have new and significant long - term economic challenges among which central banks operate. for example, in the financial system alone, we must deal with global economic inter - dependence, dominant financial institutions, significant debt burdens, technological change that challenges employment and financial inclusion norms, climate change, and much more. the list is long and the challenges have intergenerational implications. i spoke about many of these issues in a recent speech about the dangers of short - term thinking. 1 the refreshed reserve bank act and monetary policy practices, and the ongoing reviews of our legislation, position us to adapt to these changes. the aim is to ensure that the reserve bank can continue to achieve its fundamental purpose, which is “ to promote the prosperity and well - being of new zealanders, and contribute to a sustainable and productive economy ”. 2 institutions, legitimacy & identity let ’ s take a step back and talk about the backdrop to recent and pending changes to the reserve bank ’ s frameworks. the key role of a public institution is