currency had been pegged to the au dollar, new zealand ’ s exchange rate to the rest of the world would have been higher, interest rates would have risen three times already, and our recession would probably have been deeper. the argument is even stronger for other currencies, such as the us dollar. australia and new zealand are not the same, but we are far more similar to each other than to europe or the us. if our currency had been pegged to the us dollar over the past decade, interest rates would have been lower for longer in 2003 and 2004, exacerbating the housing boom ( figure 3 ). some of the challenges of a currency union can now be seen in euro area economies such as ireland, greece and spain, where monetary policy settings have been unable to lean against unsustainable domestic booms, or against the deep recessions that followed. figure 3 policy interest rates in nz, the us, and australia source : bloomberg figure 4 gdp growth in euro area economies source : datastream singapore ’ s monetary policy regime is sometimes pointed to as an alternative to inflation targeting that has maintained stability in the currency while achieving a track record of low and stable inflation. over the past two years, of course, this has not been the case, with inflation approaching 8 percent in 2008 and prices falling in 2009. over a longer period, it does appear that singapore has generally managed to guide its exchange rate to keep inflation stable. but a range of special factors made this possible – singapore ’ s extraordinarily high trade ratio, its large stock of domestic savings and foreign exchange reserves, and a range of supplementary stabilisation instruments and capital controls. in particular, in new zealand, with its much larger non - traded sector, a singaporean regime might potentially have required greater swings in the exchange rate than we actually saw to achieve similar inflation outcomes. global policies, the tax system and financial stability also matter a lesson from this period is that while monetary policy can always achieve price stability, whether this occurs in the context of balanced growth also depends on other factors. as the housing boom has shown, these factors include global policy settings and the structure of the tax system. looking back over two years of crisis, perhaps the key lesson is that financial stability cannot be ignored when thinking about macroeconomic stability and the conduct of monetary policy. we ’ ve been reminded that financial system developments have the potential to complicate monetary policy enormously, and that stable prices do not

navigating monetary policy through the unknown by adrian orr, governor a speech delivered to the peterson institute, washington dc at 1pm on 23 october 2024 ( 6am 24 october 2024 nzdt ) ref # 21721194 v1. 12 with special thanks to lewis kerr for significant input to this speech. introduction it is a privilege to be invited to speak here at the prestigious peterson institute. i have travelled from afar – the nation of new zealand or aotearoa. the latter is the name settled on by the descendants of the courageous polynesian navigators who were the first explorers to arrive sometime between 1200 and 1300ad. these people are now known as new zealand maori. our ancestors travelled long distances across the south pacific ocean to make aotearoa their home. people tell the story of kupe, the polynesian navigator who centuries ago set out from an island by the name of hawaiki on a voyage and discovered aotearoa. 1 from the outset of this voyage, his starting point would have been approximate, the destination was well beyond the horizon, and the expected time of arrival unknown. during the voyage the performance of the vessels would be sorely tested and the information to navigate on continuously changing. the challenges of the voyage were unknowable. they had to sail smart. it can only be assumed there was a strong collective belief in the existence of the destination among the crew and passengers, and equal faith in their navigator. 2 the premise of the navigator ’ s challenge resonates with the everyday challenges that leaders confront, and it is pertinent to guiding monetary policy through recent times of both calm – the great moderation – and storm – the recent years of covid - 19 induced radical uncertainty. the voyage to new zealand is believed to have been over 2, 500 kilometres ( around 1, 600 miles ) and to have taken several weeks. but kupe had a sturdy waka ( vessel ) and a fine crew – all fit for the task. they had knowledge of the ocean, weather and navigation, accumulated over centuries and passed on through generations. they were able to update their navigation as conditions changed. but most importantly, they had a clear goal in mind – the islands of aotearoa. this week i have the pleasure of attending the imf and world bank annual meetings, where policymakers are discussing how they are navigating their own waters. it ’ s an incredibly valuable opportunity to share notes with others from