Where New Zealand goes, the world goes – The Property Chronicle
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Where New Zealand goes, the world goes

The Analyst

An event in 1989 shook the world and radically changed how critical institutions operated. No, I’m not talking about the fall of communism and the following disintegration of the Soviet bloc, but of an obscure change of public policy in a land far, far away. While the rest of the world intently looked at the Berlin Wall crumbling, the New Zealand government enacted a seemingly inconsequential law that would change the world’s monetary regimes forever. They might be about to do it again.  

Let’s backtrack. In the West, the 1980s was a time of desperate search for workable monetary arrangements. We had come out of double-digit inflation in the 1970s and early 1980s; a rise of what its opponents now label ‘neoliberalism’ in the shape of Mrs. Thatcher in the UK and Ronald Reagan in the US. In 1979, Paul Volcker, a practical man more than a monetary wonk, kept hiking the Fed’s interest rates until the inflation monster gave in, and in the process exacerbated (or engineered?) a deep recession.

The 1970s stagflation, where inflation and unemployment rose at the same time – believed impossible by economists and policy-makers in charge of most central banks – had wreaked havoc with a monetary system that had worked tolerably well since the end of World War II. 

Against this monetary and fiscal confusion, central banks and monetary economists sought for a way to stabilise the economy and prevent a return to the disastrous decade they had just lived through. Plenty of options were tried, by this or that central bank, almost always involving some specific monetary aggregates such as growth in M1 (coin and notes in circulation + demand deposits) or M2 (adding savings accounts and money market shares). The results were often disastrous, with targets met only by wildly volatile interest rates, exchange rates, or credit creation in the economy. Much like a balloon squeezed at one end only to bulge out at another, monetary targeting was a hopeless attempt.

For decades until the late 1980s, the Kiwi economy had performed noticeably worse than other Western nations: higher unemployment, slower growth, and higher inflation – often much higher and much more variable, ranging from 5% to almost 20% since the 1960s.

Inflation targeting worked to bring down New Zealand’s stubbornly high inflation and anchor it at a low rate for decades to come… then almost all other central banks moved to the regime






The Analyst

About Joakim Book

Joakim Book is a writer, researcher and editor on all things money, finance and financial history. He holds a masters degree from the University of Oxford and has been a visiting scholar at the American Institute for Economic Research in 2018 and 2019. His work has been featured in the Financial Times, FT Alphaville, Neue Zürcher Zeitung, Svenska Dagbladet, Zero Hedge, The Property Chronicle and many other outlets. He is a regular contributor and co-founder of the Swedish liberty site Cospaia.se, and a frequent writer at CapX, NotesOnLiberty, and HumanProgress.org.

Articles by Joakim Book

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