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Inflation Targeting and Economic Reforms in New Zealand

Author

Listed:
  • Matteo Cacciatore

    (HEC Montréal)

  • Fabio Ghironi

    (University of Washington, CEPR, EABCN, and NBER)

  • Stephen J. Turnovsky

    (University of Washington and CESifo)

Abstract
We study the consequences of economic reforms in New Zealand since the beginning of the 1990s. Inflation targeting became the monetary policymaking framework of the RBNZ in 1990. In the years that followed, New Zealand implemented labor market reform and became increasingly integrated in world trade. We use a New Keynesian model with rich trade microfoundations and labor market dynamics to study the performance of inflation targeting versus alternative monetary policy rules for New Zealand in relation to these market characteristics and reforms. We show that nominal income targeting would have been a better choice than inflation targeting or price-level targeting prior to market reforms by delivering more stable unemployment dynamics in a distorted economic environment. Nominal income targeting would also have been better than inflation targeting with respect to the transition costs of labor market reforms, though inflation targeting allowed for better management of the transition after trade integration. With New Zealand in its new long-run environment of integrated trade and flexible labor markets, the welfare gap between nominal income targeting and price/inflation targeting declines, as market reforms lower unemployment volatility.

Suggested Citation

  • Matteo Cacciatore & Fabio Ghironi & Stephen J. Turnovsky, 2015. "Inflation Targeting and Economic Reforms in New Zealand," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 145-198, September.
    • Handle: RePEc:ijc:ijcjou:y:2015:q:4:a:4
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    References listed on IDEAS

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    Cited by:

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    2. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 358-385.
    3. Sauré, Philip, 2017. "Time-intensive R&D and unbalanced trade," European Economic Review, Elsevier, vol. 91(C), pages 229-244.
    4. Lukáš Kučera, 2018. "Investice v transmisním mechanismu cílování inflace verifikace zdrojů variability investic v České republice [Investment in the Transmission Mechanism of Inflation Targeting - Verification of Sourc," Politická ekonomie, Prague University of Economics and Business, vol. 2018(2), pages 201-217.

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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