The fact is inflation did fall to the levels called for in the PTA. Compared over

each period, inflation fell from a mean of 11.4% over 1977: II to 1990: I to a

mean value of 2.10% in 1990: II to 1993: III (Source: Dowd and Baker, see

bibliography).

One could argue that the 1989 reforms did their job as inflation did fall to almost

zero within the specified time limit and the increased credibility of the Reserve

Bank resulted in a dramatic fall in inflation expectations. However, an economist

must ask whether the fall in inflation was a direct consequence of the 1989

reforms. Earlier, in 1984 there had been a shift in New Zealand monetary policy

towards more neoclassical approach. It could be argued that the 1989 reforms

was simply an extension of this shift.

As noted by Dowd and Baker (1994), New Zealand’s fortunes were also assisted

by fortuitous events which are difficult to dismiss as having an effect on New

Zealand’s new enviable inflation record. One of these was the post – 1984 shift in

fiscal policy. As the Reserve Bank adopted a position of price stability, the

government almost simultaneously committed itself to reducing its deficit in an

attempt to balance its books. Thus the Reserve Bank was spared a potentially

significant barrier in achieving its objectives. Also there was a general consensus

in New Zealand politics concerning the importance of price stability thus the

Reserve Bank was able to continue the implementation of its policies in the

knowledge that even a change in government would not de – rail its goals.
 
 
 

A big empirical blow to the effectiveness of the increased independence of the

Reserve Bank in reducing inflation was the parallel success of their neighbour

Australia. The success of Australia brings in to doubt the effectiveness of the

1989 reforms because the Reserve Bank of Australia did not have the legislative

independence that was enjoyed by its counterpart in New Zealand. Theory would

suggest that such an institution, with a similar monetary policy would lack

credibility and thus its announcement of a low inflation could have in fact led to

an even prolonged period of high inflation. This clearly has not been the case as

research by Fischer and Debelle (1994) has found. In fact inflation levels fell to

similar rates in both countries and both are currently enjoying a period of rapid

economic growth. One could conclude that the change in the structure of the

Reserve Bank did little to achieve the goal of price stability. However,

governments still have the incentive to renege on promises to lower inflation in

order to achieve real objectives. An independent central bank may still have a

significant role to play in monetary policy.

The important issue may not so much be the central bank’s structure, but the

independence of the central bank itself.