In recent years, we have developed what we believe to be a sophisticated model of the New Zealand economy which seeks to answer one question: given all we know about the structure of the economy, about the present state of the economy (and in particular the gap between actual and potential output), about the stance of fiscal policy, about wage behaviour, about prospects for the international economy (clearly of huge importance for a small country like New Zealand), and so on, what are the monetary conditions required to deliver inflation to somewhere close to the middle part of our inflation target in six to eight quarters’ time?
Nobody pretends that that is an easy question to answer, or that our model is flawless, but it seems to us that that is the right question. Note that I referred to the ‘monetary conditions required to deliver inflation to somewhere close to the middle part of our inflation target in six to eight quarters’ time’.