Inflation Targeting—The New Zealand Experience

Beginning about 1967, New Zealand experienced a stretch of high inflation that lasted more than two decades. For much of that period, consumer inflation ran in the mid-teens, with peak inflation just short of 20 per cent (Figure 1). Inflation was never politically tolerable. Reflecting that fact as well as the reluctance to grapple with the underlying sources of inflationary pressures, New Zealand made two attempts during the 1970s to outlaw inflation by way of wage and price controls. In the early 1980s, a further attempt was made by way of a comprehensive freeze on wages, prices, rents, interest rates, dividends, directors’ fees, and the exchange rate. It was the obvious unsustainability of that last and most draconian attempt at market suppression that finally paved the way for the sweeping reforms and deregulations introduced by the 1984 Labour government. Included in the package of reforms was a new approach to the operation of monetary policy that was designed to attack New Zealand’s persistent inflation problems at their source.