THE NEW-ZEALAND APPROACH TO RULES AND DISCRETION IN MONETARY-POLICY

The legislative framework under which the Reserve Bank of New Zealand operates was changed in 1989, to one providing for a tightly construct ed target (rule), with discretion over instrument choice. The rational e for the change rests on the idea that damage to long-run growth woul d follow if monetary policy were to pay active attention to the short- run output and employment consequences of monetary policy actions. The rule now in place thus prohibits monetary policy from active consider ation of output and employment as objectives in their own right, Initi al results provide tentative evidence of the benefits of the approach.