How large are the gains to commitment policy and optimal delegation for New Zealand?

This paper measures the benefits of commitment-based monetary policy over discretion for a small open economy inflation targeting country—New Zealand. Significant gains accrue from commitment policy. If commitment-based policy is unavailable, the government can recoup much of the gains to commitment through optimal delegation, asking the Reserve Bank of New Zealand to care more about inflation stabilisation. The 1999 PTA, the core of the policy contract between the New Zealand government and the Reserve Bank of New Zealand, placed an increased emphasis on stabilisation of output, interest rates and the exchange rate. This is inconsistent with a shift to optimal delegation behaviour and must stem from a changed perception of the welfare costs of macroeconomic stabilization on the part of the Government. This is shown to be true when the definition of inflation is extended to a medium term measure.