Financial Policy Reform in New Zealand

Abstract:     
The paper begins with a brief review of the major problems facing the economy in 1984 and discusses how the financial regulatory framework had contributed to the development of those problems. A presentation of the sequencing of reforms follows. The main financial and other economic reforms are outlined and their consequences are discussed. Particular attention is paid to issues concerning volatility in financial and foreign exchange markets under deregulation as well as the relationship between monetary aggregates and nominal income or inflation in the formulation of monetary policy in the new environment. Also discussed are the effects of liquidity constraints in the monetary policy transmission mechanism and the impact of nominal shocks on the performance of the real sector under a policy of disinflation. Issues arising from new Zealand’s experience of deregulation and disinflation are presented in the concluding section of the paper. An important finding, especially for governments interested in embarking on financial reforms, is that the authorities were able to maintain monetary control despite financial reform, though volatility of interest rates and exchange rates may have been exacerbated in the process. Also, the slower implementation of trade and labor market reforms may have increased the costs of reducing inflation during the adjustment process.

Keywords: New Zealand, Financial Policy, Reform, 1984, Regulatory framework, Monetary Policy

JEL Classification: A12, G10, G31

Accepted Paper Series