ABSTRACT
In the course of the almost worldwide move towards granting Central Banks operational independence, there have been several interrelated strands of argument. The first arose as a reaction in New Zealand from Prime Minister Muldoon’s ham-fisted interference with, and political manipulation of, every aspect of that country’s economy but particularly of its public sector, during the 1980s, an episode which illustrates that government interference in the economy can emanate from right-wing governments as much as from those on the left. Anyhow, the question which the then incoming Labor government, and its Finance Minister, Roger Douglas, sought to answer was how to minimize constant political interference in the public sector, and yet at the same time to achieve commonly agreed objectives in the provision of public services; in the case of monetary policy that service being primarily price stability Note that if such objectives could be obtained through competition and the pursuit of profit maximization, then the correct answer was, of course, privatization. In other cases, the general answer that was found was to specify as closely as possible, the objectives to be attained by the public sector bodies responsible for achieving them, in a contract with the government, and then to leave the managers with the freedom to make the necessary operational decisions, subject to strict accountability for the achievement of outcomes (though not for processes or methods, as those of us in Universities who have suffered from the appalling QAA studies on teaching methods would wish to emphasize). In this context operational independence for the Reserve Bank of New Zealand (RBNZ) was not primarily about the specifics of monetary policy but rather the application to the RBNZ of a generalized approach to public sector bodies, which had already been applied to numerous other New Zealand public sector industries and services.
