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.
