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Twenty years of inflation targeting

David Baqaee, Christie Smith

In December 2009 the Reserve Bank of New Zealand, in conjunction with Northwestern University's Centre for International Economics and Development (CIED), hosted a monetary policy conference to mark the 20th anniversary of the Reserve Bank of New Zealand Act. Passed in December 1989, the Act was one of the seminal events in the development of inflation targeting as a monetary policy regime. Inflation targeting, with its emphasis on price stability, policymaker independence, and communication to influence expectations, has become hugely influential internationally as a monetary policy framework. As of 2009, 26 countries have explicitly adopted inflation targeting, including Canada, the UK, Australia, Sweden and Norway. 1 Even in countries and regions that do not have an explicit inflation targeting framework, such as the euro area and the US, the ideas underpinning inflation targeting and the methods used to implement policy in an inflation targeting regime have become increasingly influential. 2 It is therefore fitting that the Reserve Bank and the CIED chose to celebrate this historic, 20-year milestone. A conference on monetary policy was particularly apt for 2009 because macroeconomic developments over the last two years have created the largest stresses for the global economy, the global financial system, and policy frameworks since the Great Depression of the 1930s. The decline in global economic activity in 2009, now being termed "the Great Recession" in the US, has prompted renewed scrutiny of macroeconomic stabilisation policy, financial systems, and the regulatory frameworks within which financial institutions operate. 3 Policy questions are among the pre-eminent concerns that have arisen from the Great Recession. For example: Should one seek to stabilise the economy through fiscal or monetary policy? How effective is fiscal policy in times of crisis? What kind of 'unconventional' monetary policies are available, and how (and why) might they work? What kinds of credit frictions are operational, and how do they influence the propagation of shocks? How should policy be operated in the context of a small open economy? What sort of financial regulation should be implemented and what consequences does regulation have for long-run optimality? At the December conference, leading academics and staff from the Reserve Bank came together to address these and related questions.