Central Bank Independence, Fiscal Responsibility, and the Goals of Macroeconomic Policy: An American Perspective on the New Zealand Experience


In contemporary New Zealand, microeconomics is in the ascendant over macroeconomics, to such an extent that neither the Reserve Bank nor the Cabinet and Treasury appear to give much attention to shorter-run macroeconomic stabilization as a policy goal. This lecture examines why thoughtful New Zealanders are attracted to this atypical aversion, and asks whether that aversion is in New Zealand’s best interests.

The lecture concludes that New Zealand’s Reserve Bank Act provides admirable institutional arrangements for the political independence of the central bank in New Zealand. Insulation from the political process protects against excessively short-sighted pressures on monetary-policy decisions. Because the Reserve Bank has instrument independence, but not goal independence, monetary policy is appropriately subject to democratic accountability. In principle, the credibility and time consistency of policies can be enhanced by mandating that neither the Reserve Bank nor the Government should engage in macroeconomic stabilization. Yet the economy might incur avoidable costs if policymakers stay completely out of that business. Accordingly, the tradeoff between credibility and time-consistency advantages on the one hand and potential gains from stabilization flexibility on the other deserves more careful attention than it typically receives in New Zealand. The emphasis in New Zealand on getting the long-run aspects of economic policies right is easily explained by recent history. Furthermore, the long-run aspects should continue to have priority. But putting primacy on the long run need not preclude some complementary role for shorter-run macroeconomic stabilization. The credibility advantages of complete abstinence are probably not so overwhelming as to justify keeping macroeconomic stabilization locked up in the closet.