Monetary policy objectives- price stability and macro stabilisation

As of 2018, the Reserve Bank of New Zealand has a dual mandate for monetary policy focused on targeting price stability and supporting maximum sustainable employment. In this article, we discuss the Bank’s policy objectives in a broader historical context, illustrating how the aims and objectives of monetary policy have varied over time in response to pressing societal issues. The emphasis of this Bulletin article is on the objectives of monetary policy. Monetary objectives are one component of a wider set of legislated, economic objectives determined by government. Notwithstanding central bank independence, there has often been significant interplay between monetary objectives and the macro objectives set for fiscal policy. Monetary policy objectives have also fluctuated between two orientations. First, providing a stable unit of account and predictable monetary framework to facilitate private transactions. Second, proactively using monetary policy to shape the allocation of real resources to improve welfare. Inflation targeting represents a middle ground between these two orientations. In sections 2 and 3 of this article, we discuss the history of central bank objectives leading up to the development of dual mandates. The key message from these sections is that monetary policy objectives have evolved over time, reflecting different societal needs, evolving empirical experience and theoretical insights. In section 4, we outline why price stability and macroeconomic stabilisation are common objectives for monetary authorities and discuss the interplay between monetary objectives and theoretical insights over time. Section 5 concludes.