In a speech in Christchurch, Dr Bollard said New Zealand would be better prepared for economic recovery if households, firms and banks did not "pull the shutters down".
The economy was in the middle of a major international shock that was developing from financial turbulence into economic recession.
"Households, firms and banks will naturally be very cautious during this process. However, we should also be watchful for opportunities and mindful of the risks of defeatism."
Within the Western world, New Zealand's economy and financial system were relatively well-placed to weather the adjustment, he said.
Past recoveries had occurred suddenly and strongly and New Zealand needed to remain well-positioned for such a recovery.
In a reversal of past speeches, Dr Bollard urged households and firms to keep spending and for banks to continue lending to sound business propositions.
New Zealand had not escaped the impact of the massive international credit crunch.
"In our case, the tightening has exposed vulnerabilities associated with household and external indebtedness and how this debt is funded. The global recession is also now affecting us through trade channels and a slump in world commodity prices."
New Zealand's policy responses had probably been about as successful as might be expected, he said.
The central bank had eased monetary policy substantially and very rapidly. Inflation remained under control, following the largest international commodity and asset price surge for decades. The bank had expanded its liquidity facilities. Cash continued to circulate, despite enormous pressure to hoard it.
"Our banking system remains well-capitalised and has avoided the problematic credit exposures that have brought some major financial institutions to their knees," Dr Bollard said.
The Reserve Bank's official cash rate was headed down to 2% and would remain there for a considerable length of time, Bank of New Zealand economist Stephen Toplis said.
The Reserve Bank slashed the OCR by 1.5% on Thursday to take it to 3.5%, the lowest it had been since it was introduced in March 1999.
"That's a massive 4% in just three meetings. We were a little surprised by the magnitude of the move. We'd thought that a more conservative 1% would do the trick."
Mr Toplis had no difficulty with the rationale that the Reserve Bank provided to support its move.
In short, the central bank was "terrified" by what it saw happening offshore and the likely implications of that on the New Zealand economy. It took a no-holds-barred approach, he said.
As recently as last month Dr Bollard declared that the recession was over.
"It seems he has now reached a somewhat different conclusion, as have we all. While this remains so, the only direction for interest rates, and probably the New Zealand dollar, is down. It's not when, it's how much."
