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Direct Inflation Targeting: The Case of New Zealand

Structured Assignment
Prerequisite Conceptual Understanding:

For understanding the importance of inflation targeting in transition economies: Bernake Ben S.
and Mishkin Frederic S. Inflation targeting: A New Framework For Monetary Policy,
http://www.nber.org/papers/w5893

For a better theoretical understanding of Monetary and Fiscal Policy: Branson, William H.
Monetary, Fiscal, and Income Policy in the Static Model, Macroeconomics Theory and Policy,
2nd Edition, A.I.T.B.S. Publisher & Distributors, 1998, pages 164-180

Monetary Policy: An Overview

1. In the short run inflation occurs due to many reasons. However, for the purpose of policy
making and welfare, inflation is analyzed over the long run. [Section: Introduction, para 2 of
the case study]. Discuss the causes and consequences of Inflation both in the short and long
run.

2. Analyse the interrelationship between inflation and monetary policy. How does the monetary
policy decision affect the inflation expectations in an economy?

3. Discuss the salient features of inflation targeting monetary policy. How it is different from
immediate target based monetary policy?

Inflation targeting monetary policy in New-Zealand: An Analysis.

4. The Act spelled out that the primary function of the RBNZ is to formulate and implement
monetary policy with the objective of achieving and maintaining stability in the general price
level. [Section: Monetary Policy in New-Zealand, para 2 of the case study]. Analyze the
role of Direct Inflation Targeting Policy in shaping the Monetary Policy of New-Zealand. Also
discuss how the price stability was achieved between 1990 to January 2007.

5. The strong economic performance was indicative of the build up of inflationary tendencies and
the RBNZ hiked the OCR by 150 1 basis points between November 1999 and May 2000, from
5.00% 2 to 6.50% 3 [Section: Phase III (April 1994-April 2007), para 3 of the case study].
Taking into consideration the example of New-Zealand, explain the relation between interest rate
movements and liquidity in the money market in the generalized static closed economy IS-LM
framework.
1 Recent Economic Performance, OECD Economic Surveys 2002: New-Zealand, Volume 2002/8 June, ISBN 92-64-19150-

X, page 22
2 Official Cash Rate (OCR) Decisions and Current Rate, http://www.rbnz.govt.nz/monpol/statements/0090630.html
3 Ibid.

This Structured Assignment was written by Ray K and Panigrahi P, IBS Research Center. It was prepared to accompany
the case Direct Inflation Targeting: The Case of New Zealand. The case was complied from published sources.

2009 IBS Research Center.

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6. In 1984 there was 20% 4 exchange rate devaluation. This was the final of a series of earlier
devaluation of the currency and finally in 1985 the New-Zealand Dollar (NZD) 5 was freely
floated. [Section: Activist-Monetary-Policy Phase, para 1 of the case study]. Taking into
consideration the example of the small open economy of New-Zealand, explain the impact of
fiscal policy as well as monetary policy in a generalized Mundell-Flemming framework with
floating exchange rate.

An Analysis of Fiscal Factors Influencing the Efficacy of New-Zealands Monetary Policies.

7. How did the fiscal consolidations of the Government of New-Zealand during the period 1994-
2006 helped in maintaining price stability? Explain with the help of a generalized static closed
economy aggregate demand-supply framework, the impact of government fiscal policy on money
supply, employment and growth.

8. Explain with the help of cross-country experiences, the success of Direct Inflation Targeting
Monetary Policy in maintaining price stability.

4 Sherwin Murray, Inflation Targeting The New-Zealand Experience, http://dsp-psd.pwgsc.gc.ca/Collection/FB2-11-

1997E-14.pdf
5 New-Zealand Dollar, currency code is NZD is the currency of New-Zealand. It is also nick named Kiwi Dollar or Kiwi $. The

sub-unit is cent and 1NZD=100Cents. It came into circulation in 1967 by replacing the New-Zealand Pound.