Thirty years of inflation targeting in New Zealand: The origins, evolution and influence of a monetary policy innovation.

Abstract

Nearly thirty years ago New Zealand ushered in a revolutionary approach to monetary policy. This was formalised by the Reserve Bank of New Zealand Act 1989 which specified price stability as the primary function of monetary policy and provided operational independence for New Zealand’s central bank. This innovation spawned the spread of more central banks around the world with a mandate to prioritise inflation targeting. This paper explains the historical origins of the RBNZ Act, its design and the ideas that influenced its design. It reviews how the practice of inflation targeting and the choice of policy instruments have evolved. The paper includes a review of research evaluating the impact of inflation targeting in New Zealand and concludes with a discussion of contemporary issues including a proposal before the New Zealand Parliament to introduce significant changes to the Act which could have important implications for future monetary policy.