30 March 2001

What central banks can and can't do

Reserve Bank Governor Don Brash is urging people to be realistic about what monetary policy can achieve.

Speaking to the Trans-Tasman Business Circle in Sydney, Dr Brash said that "In recent years ... the public have come to believe that central banks can achieve very much more than they can, in reality, deliver."

The risk, he said, was that, when economies failed to perform to expectations, "Central banks will receive far more than their fair share of blame."

Dr Brash said the goal of price stability was "extremely important", in terms of the economy, and in addition "In many ways, keeping the value of money broadly stable makes a bigger contribution to social justice than it does to economic growth".

Monetary policy targeted at price stability also reduced the economic and social dislocation caused by booms and busts, he said.

However, Dr Brash warned of unrealistic expectations about things that central banks could not achieve, as "There has been a tendency to attribute to monetary policy and central banks an influence on the economy out of all proportion to the reality."

"Central banks can not have any substantial effect on trend growth in output or trend growth in employment," and "central banks cannot solve regional, or sectoral, problems," as monetary policy must relate to "the economy as a whole".

Dr Brash said it was the policies of governments that had a material influence on growth and employment, some of the issues being taxation rates, property rights, education, and whether markets were distorted or not.

"More fundamentally ... trend growth in output and employment are both a function of culture and social attitudes."

Dr Brash said examples of those attitudes were how much people valued education, independence from the state, private property rights and consumption in the future over consumption in the present and "none of them have much relation to monetary policy".

For further information contact
Paul Jackman
Corporate Affairs Manager
Ph 04 471 3671, 021 497 418, home 04 938 8177, Jackmanp@rbnz.govt.nz