# The Origins of Inflation Targeting in New Zealand | Capitalism & Freedom Source: https://www.youtube.com/watch?v=eo3rpHI8uXo Recap page: https://rapidrecap.app/video/eo3rpHI8uXo Generated: 2025-12-04T16:42:09.246+00:00 --- ## 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). ## Detailed Analysis Don Brash explains that New Zealand's inflation targeting regime, which began formally in 1990, was unique because the elected government decided the target inflation rate, which the central bank governor was then bound to deliver under contract, a structure later adopted by several other developed nations. The initial 0 to 2% target, later formalized, was surprisingly derived from a casual comment by Finance Minister Roger Douglas, although it was subsequently rationalized based on estimated CPI measurement bias (around 1%). Brash recounts that during his tenure, despite extremely tight monetary policy leading to 11% unemployment, he successfully anchored expectations by communicating directly with the public, even persuading union leaders to moderate wage demands consistent with the inflation target. He rejects the dual mandate favored by the US Fed, asserting that a single mandate (inflation control) is superior, as fiscal and monetary policy goals can conflict, making the separation of political judgment (setting the target) and technocratic execution (delivering it) essential. Furthermore, Brash touches on domestic policy failures, noting that restrictive land use regulations caused severe housing unaffordability, and discusses New Zealand's trade pivot from the UK (2/3 of exports in the 1950s) to China (26% currently). ### Origins of Inflation Targeting - The 0 to 2% target originated from a flippant remark by Roger Douglas, later formalized in 1989 legislation that mandated the government choose the rate and the central bank deliver it - This framework contrasts with independent central banks, placing direct accountability on the Governor initially. ### Monetary Policy Implementation - The RBNZ initially focused heavily on convincing the public rather than tracking money aggregates, using a small lever targeting the aggregate of system balances with the central bank, which proved effective through implied threats of tightening. ### Evolution of the Target - The 0-2% band was rationalized post-hoc as price stability plus or minus 1% due to CPI measurement bias, later shifting to 0 to 3% to allow for more shocks, and finally to 1 to 3% (midpoint 2%) to avoid easing too aggressively when inflation neared zero. ### Central Bank Independence and Mandates - Brash champions the single mandate, arguing against the US dual mandate because 'you cannot have more than one goal per instrument' when objectives conflict, emphasizing that the government sets the political goal (inflation rate) and the central bank executes it. ### Market Reforms and Personal History - Brash's pro-market track began after his PhD research at ANU reversed his initial negative view on American investment in Australia - He helped design New Zealand's Goods and Services Tax (GST) with Roger Douglas, creating a simple VAT with no exemptions. ### New Zealand Economic Challenges - Housing affordability is critical due to tight land controls, though recent government efforts are slowly reducing the price-to-income ratio from 11 to 8.5 - Trade has drastically shifted, with China now taking 26% of exports, compared to 2.6% from the UK.