The Output-inflation Tradeoff and Central Bank Reform: Evidence From New Zealand



The 1989 Reserve Bank of New Zealand Act provides a natural experiment in which the effects of institutional change on economic relationships can be studied. The Act set price stability as the single objective of monetary policy and gave the Bank great independence. Reforms of this nature may lead to a greater short-run output-inflation tradeoff by altering optimal stabilisation policy and wage indexation. Allowing for environments where ‘learning’ about the new regime is assumed to be rapid as well as slow, we find that a large rise in the New Zealand tradeoff has occurre d since implementation of the Act