New Zealand's Economy
Inventing Inflation Targeting
How New Zealand's Reserve Bank Act of 1989 made it the first country to adopt formal inflation targeting, an idea later copied worldwide, including by India.
New Zealand invented inflation targeting.
Reserve Bank Act 1989
- Gave the Reserve Bank of New Zealand independence.
- Set a formal inflation target agreed with the finance minister.
Why
High inflation in the 1970s and 1980s damaged the economy.
Results
Inflation fell and stayed low.
Global spread
- Canada, the UK and many others adopted inflation targeting.
- India adopted a flexible inflation target of 4% (±2%) in 2016.
Dual mandate
In 2019, New Zealand added employment to the Reserve Bank’s goals; in 2023 it returned to a single inflation focus.
The target
The governor's contract once tied their job to keeping inflation within the agreed range.
Thinking inflation targeting started in the US
New Zealand was first.
Key takeaways
- The 1989 Act created inflation targeting.
- High inflation motivated it.
- Many countries copied it, including India in 2016.
- Mandates have changed over time.
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