Angst about the exchange rate is understandable but the belief that if only monetary policy were run differently the problem would go away is mistaken, says Reserve Bank assistant governor John McDermott.

Summing up a day-long forum on the exchange rate run by the bank and the Treasury on Tuesday, McDermott said the economy faced some serious challenges and some things needed to change.

"But the way New Zealand's monetary policy is conducted - quite conventional by advanced country standards - is not one of those things," he said.

The hard-won lessons of the past showed that you could not sustainably generate more growth, in the real economy or in exports, by keeping monetary policy unjustifiably loose.


"And any attempt to do so would create future inflationary problems which would be costly, in terms of growth and employment, to resolve," he said.

A more appropriate place to look for solutions is the chronic imbalance between investment and savings.

Economic theory predicted that a lack of national savings relative to the economy's investment needs would result in interest rates higher than the global average, a high exchange rate and persistent current account deficits, McDermott said.

And that matched the experience of New Zealand over the past 40 years.

One of the papers presented to the forum, by Treasury economist Anne-Marie Brook, said that New Zealand stood out among developed countries in not giving people significantly tax-preferred saving vehicles other than property.

"One option may be to reduce the tax rate on capital income, such as by extending the existing PIE regime, although such a reform would need to be packaged together with other tax changes to mitigate the equity and revenue impacts," she said.

"Another option would be to move towards a private save-as-you-go pension system, which would pair compulsory savings with means testing of New Zealand Superannuation."

Michel Reddell, a Reserve Bank economist, focused instead on the investment side of the imbalance.

He argued that New Zealand's population had been materially above average for a developed country since immigration policy was liberalised in the late 1980s and early 1990s, and that had boosted the need for investment in housing and infrastructure, while savings remained "quite modest".

The resulting higher interest rates and high average real exchange rate had crowded out other productive investment, Reddell said.