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Is New Zealand's Reserve Bank Act of 1989 an optimal central bank contract?

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  • Carl E. Walsh

Abstract

This paper evaluates the Reserve Bank of New Zealand Act of 1989 from a principal-agent perspective, arguing that the act represents a dismissal rule. The optimal dismissal rule requires that the central banker be dismissed whenever inflation exceeds a critical level that depends on aggregate supply disturbances and measurement error in the inflation index. This is essentially the structure established by the act. The scope for renegotiating the target rate, however, creates an incentive for the government to set the critical rate too high. Consequently, the inflation bias of discretion is reduced but not completely eliminated. Copyright 1995 by Ohio State University Press.
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Suggested Citation

  • Carl E. Walsh, 1994. "Is New Zealand's Reserve Bank Act of 1989 an optimal central bank contract?," Pacific Basin Working Paper Series 94-01, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfpb:94-01
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    5. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
    6. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    7. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
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