Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?

By Walsh, Carl E. | Journal of Money, Credit & Banking, November 1995 | Go to article overview

Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?


Walsh, Carl E., Journal of Money, Credit & Banking


The literature on the inflation bias that can arise under discretionary monetary policy has emphasized the value of establishing a reputation for following credible policies designed to sustain low inflation. The ability to achieve such a reputation can depend on the institutional structure that governs the conduct of monetary policy. Because of this, a great deal of interest has been generated by the Reserve Bank of New Zealand Act of 1989. This Act was designed to give New Zealand's Reserve Bank greater independence from political influence, establish a single objective for monetary policy (price stability), and ensure accountability on the part of the Reserve Bank for the achievement of its policy objective. The basic structure of the Reserve Bank Act has been cited as a useful model for other countries (Willett 1994), but little formal analysis of the new law has yet appeared in the literature. Dawe (1993) provides a discussion of the Reserve Bank Act, while Fischer (1993) interprets New Zealand's monetary policy under the Act as an inflation-targeting policy and provides an excellent discussion of such policies. Buckle and Stemp (1991) formally analyze policy under the Act as equivalent to a price-level-targeting policy. These approaches capture some aspects of New Zealand's new policy process, but they neglect other aspects and thus may not provide a complete evaluation of the unique institutional changes contained in the Reserve Bank Act.

The Act specifies a complex set of relationships between the Reserve Bank and the government. These cover such issues as the appointment and reappointment procedures for the Governor of the Reserve Bank, the establishment of short-run inflation targets, and the conditions under which these targets may be modified. The Act essentially establishes a contract between the central bank and the government; the nature of this contract determines the incentives facing the Reserve Bank and, as a result, affects the conduct of monetary policy. Viewing central bank institutions as contracts leads one naturally to ask what sorts of incentives such contracts should establish for the central bank, and to ask whether the contract implicit in New Zealand's new Act is in some sense optimal. The purpose of this paper is to evaluate the Act using the principal-agent approach to central bank design developed in Walsh (1993, 1995) and Persson and Tabellini (1993).

An overview of the Reserve Bank Act is provided in section t. The key aspects of the legislation likely to affect the conduct of monetary policy are discussed, and it is argued that the Act establishes a dismissal rule for the Reserve Bank Governor. Section 2 then derives an optimal dismissal rule which is used in section 3 to evaluate the Reserve Bank Act. Conclusions are summarized in section 4.

1. THE RESERVE BANK ACT

The Reserve Bank Act took effect on February 1, 1990, and was part of a broader governmental reform program designed to increase accountability in the public sector. The Act's purpose was to establish a clear and achievable policy objective for which the Reserve Bank could be held accountable. New Zealand's central banking reforms were motivated by its poor inflation performance (see Fischer 1993). As Table 1 shows, relative to the rest of the OECD, inflation was higher in New Zealand prior to the first oil price shock in 1973, New Zealand's inflation rate rose more during the 1970s, and it fell less after the general shift by OECD countries to disinflationary policies in the first half of the 1980s. Except for the temporary impact of wage and price controls in 1982-1984, inflation fluctuated around the 12-15 percent level from the mid-1970s until 1986.(1) While piecemeal reform in the mids 1980 gave the Reserve Bank the tools to achieve price stability as early as 1985 (Walsh 1988), previous unsuccessful attempts to reduce inflation meant the Reserve Bank lacked the credibility necessary to minimize the output costs of disinflation and to maintain low inflation. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.