The Origins of Inflation Targeting in New Zealand | Capitalism & Freedom

Quick Overview

Don Brash pioneered inflation targeting in New Zealand starting in 1990, establishing a framework where the elected government chose the inflation rate, which the central bank (specifically the Governor initially) was legally mandated to deliver, a model later adopted by Australia, Canada, Sweden, and the UK.

Key Points: Don Brash served as Governor of the Reserve Bank of New Zealand from 1988 to 2002, pioneering the world's first inflation targeting regime, formalized by 1989 legislation. The initial 0 to 2% inflation target was derived from a flippant off-the-cuff remark by then-Finance Minister Roger Douglas on television after inflation dropped below 10%. The New Zealand framework mandated that the inflation rate choice was a political decision for the elected government, but the delivery was the responsibility of the central bank technocrats, making the Governor personally responsible initially. Brash stated that New Zealand later rationalized the 0 to 2% target by equating 1% measured inflation to actual price stability due to CPI measurement biases, citing the US Boskin Committee estimation of a 1% bias. The framework initially required the Governor to deliver the target or face dismissal, though this changed after an exogenous shock (First Gulf War oil price spike) required a formal letter recommending against firing the Governor. Brash strongly prefers the New Zealand framework over the US dual mandate, arguing that 'you cannot have more than one goal per instrument,' asserting the government should set the devaluation rate politically, and the central bank should deliver it independently. Brash noted that tight land use regulations around major New Zealand cities created outrageously expensive housing, similar to US coastal cities, though the current government is making modest progress in reducing the median house price to income ratio from 11 down to 8.5.

Context: The interview features host John Harley speaking with Don Brash, former Governor of the Reserve Bank of New Zealand (1988-2002) and later leader of the National Party. The discussion centers on the origins and implementation of inflation targeting in New Zealand, which Brash pioneered, contrasting it with other central banking models like the US Federal Reserve's dual mandate. Brash details his personal journey from initially focusing on foreign policy to embracing pro-market economics after studying foreign investment benefits in Australia, and his subsequent roles in banking, kiwi fruit farming, and advising the Labor government on market reforms like the Goods and Services Tax (GST).