New Zealand’s Thirty-Year Experience with Inflation Targeting: The Origins, Evolution and Impact of a Monetary Policy Innovation

Thirty years ago, New Zealand ushered in a revolutionary approach to monetary policy. This approach was formalized by the Reserve Bank of New Zealand Act 1989 which specified price stability as the primary function of monetary policy and provided operational autonomy for the central bank. This institutional innovation spawned the spread of more central banks around the world with a mandate to prioritize inflation targeting. This paper explains the historical origins of the RBNZ Act, its design and the ideas that influenced its design, and how the practice of inflation targeting and choice of monetary policy instruments have evolved. Some parts of this evolution were pioneering, and some parts followed international practice. The paper also reviews evidence of the impact of inflation targeting in New Zealand and discusses recent changes to the RBNZ Act.