THE OUTPUT-INFLATION TRADEOFF AND CENTRAL BANK REFORM - EVIDENCE FROMNEW-ZEALAND

The 1989 Reserve Bank of New Zealand Act provides a natural experiment in which the effects of institutional change on economic relationship s can be studied. The Act set price stability as the single objective of monetary policy and gave the Bank great independence. Reforms of th is nature may lead to a greater short-run output-inflation tradeoff by altering optimal stabilisation policy and wage indexation. Allowing f or environments where 'learning' about the new regime is assumed to be rapid as well as slow, we find that a large rise in the New Zealand t radeoff has occurred since implementation of the Act.