In May 2000, the Government announced that the New Zealand monetary policy framework would be reviewed. Professor Lars Svensson of Stockholm University was appointed to undertake the review and to report by the end of February 2001. Professor Svensson’s report was released by the Treasurer/Minister of Finance on 28 February.
In this issue of the Bulletin, we have published the Executive Summary and recommendations of the Svensson Report, together with the terms of reference of the review. The complete report by Professor Svensson can be obtained from the New Zealand Treasury and can be accessed on www.monpolreview.govt.nz – the monetary policy review website, and on www.rbnz.govt.nz – the Reserve Bank of New Zealand’s website.
As can be seen from the press statements issued by the Treasurer/Minister of Finance (reprinted in this Bulletin), the Government will be giving consideration to the recommendations made by Professor Svensson, with a view to announcing decisions before the end of May.
Executive Summary of the Report to the Minister of Finance, by Professor Lars E. O. Svensson
The following is a copy of the Executive Summary of Professor Svensson report. Words in italics are italicised in Professor Svensson’s report.
In May 2000, the Treasurer/Minister of Finance invited me to review the operation of monetary policy in New Zealand and provided me with the Terms of Reference. In undertaking the review, I have read the wide range of submissions provided to me and have met with a number of submitters and other interested parties. I visited New Zealand for two weeks in November 2000 in order to observe the operations of the Reserve Bank first hand and collect material for the review. I have also had discussions with a number of key people in the area of monetary policy from other countries.
In order to judge whether the operation of monetary policy has been effective, it is important to understand what monetary policy can and cannot do. People typically ask too much of monetary policy – no less in New Zealand than elsewhere. In the long term, monetary policy can only control nominal variables such as inflation and the nominal exchange rate. It is beyond the capacity of any central bank to increase the average level or the growth rate of real variables such as GDP and employment, or to affect the average level of the real exchange rate. At best monetary policy can reduce the variability of these real variables somewhat. An attempt to increase the average level or growth rate of GDP or employment would trigger ever-rising inflation, at increasing cost to the economy in terms of less efficient resource allocation and arbitrary and inequitable redistributions of incomes and assets. For these reasons, an increasing number of countries have specified price stability as the primary goal for monetary policy.
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