Germany has adopted an approach more attuned to the Rogoff model, where the

independence of the central bank has constitutional independence. The

Bundesbank is relatively unconstrained in the path it takes to achieve its final

objective.
 

On the other hand, the system adopted by New Zealand is along the line of the

principal – agent models designed by economists such as Walsh, Persson and

Tabellini where the Reserve Bank is bound in a contractual framework with less

room for manoeuvre. The differences in the two approaches are summarized in

Table 1.2.
 

                                                                   Table 1.2
                        Alternative Approaches to Central Bank Independence
 
 
 

                                                          Constitutional /             Legal/performance
                                                            reputational                        contract

Example                                   Deutsche Bundesbank         Reserve Bank of
                                                                                                     New Zealand
Policy objective

Price stability                               Primary objective              Sole objective

Supporting
government                                  Secondary objective                     -
economic policy

Government                              Only implicit (new law)      Statutory provision
override                                                                                   in current law

Policy targets

Obligatory                                                 No                                Yes

Agreed with                                              No                                Yes
government

Escape clauses                                        No                                Yes

Time horizon                                             No                             3 years

Responsibility

Laid upon                                                Board                         Governor

Monitoring                                          Only implicit           Dismissal of governor
                                                                                              for failure
 
 

                                                         Source: Eric Roll, 1993.