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The Output-Inflation Tradeoff and Central Bank Reform: Evidence from New Zealand

  • Hutchison, M M
  • Walsh, C E

The 1989 Reserve Bank of New Zealand Act provides a natural experiment in which the effects of institutional change on economic relationships can be studied. The act set price stability as the single objective of monetary policy and gave the bank great independence. Reforms of this nature may lead to a greater short-run output-inflation trade-off by altering optimal stabilization policy and wage indexation. Allowing for environments where 'learning' about the new regime is assumed to be rapid as well as slow, the authors find that a large rise in the New Zealand trade-off has occurred since implementation of the act.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 108 (1998)
Issue (Month): 448 (May)
Pages: 703-25

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Handle: RePEc:ecj:econjl:v:108:y:1998:i:448:p:703-25
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  1. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
  2. Marta Campillo & Jeffrey A. Miron, 1997. "Why Does Inflation Differ across Countries?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 335-362 National Bureau of Economic Research, Inc.
  3. Kiley, Michael T, 2000. "Endogenous Price Stickiness and Business Cycle Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 28-53, February.
  4. David Mayes & Bryan Chapple, 1995. "The costs and benefits of disinflation: a critique of the sacrifice ration," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 58, March.
  5. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
  6. Froyen, Richard T. & Waud, Roger N., 1995. "Central bank independence and the output-inflation tradeoff," Journal of Economics and Business, Elsevier, vol. 47(2), pages 137-149, May.
  7. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  8. Cukierman, Alex & Kalaitzidakis, Pantelis & Summers, Lawrence H. & Webb, Steven B., 1993. "Central bank independence, growth, investment, and real rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 95-140, December.
  9. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  10. Walsh, Carl E, 1995. "Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1179-91, November.
  11. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, vol. 7(1), pages 5-18, January.
  12. Eijffinger, S.C.W. & Schaling, E., 1995. "The ultimate determinants of central bank independence," Discussion Paper 1995-5, Tilburg University, Center for Economic Research.
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