Reshaping the reserve : the political economy of central banking in Australasia : a thesis presented in fulfilment of the requirements for the degree of Doctor of Philosophy in Public Policy at Massey University, Turitea, Palmerston North, New Zealand
Changes in the relative influence of state and market in the final quarter of the twentieth century are no better evidenced than in the institutional evolution of the central bank. Central banks are increasingly possessed of a large measure of independence from political authorities, set the limits on economic growth and on employment, and to a very large extent the parameters within which governments exercise taxation and expenditure decisions. In 1989 the New Zealand Parliament passed the Reserve Bank of New Zealand Act. The Act mandated the Bank to focus exclusively on one objective - price stability - and provided the Bank with complete operational independence to pursue that objective. The New Zealand legislation is perhaps the cleanest expression of an institutional prescription supported by the rational economics literature. Central bank independence - by which is meant operational independence to deliver price stability - is seen as the remedy for a democratic distemper in which politicians will manipulate policy levers in an opportunistic manner, and with adverse economic consequences. The statute repealed by the 1989 New Zealand legislation offended against the rational economics prescription - the Bank was required to direct policy towards multiple objectives and was dependent on the government of the day for much of its operational direction. That earlier statute had much in common with Australia's Reserve Bank Act 1959 which required the Reserve Bank of Australia to protect the stability of the currency, maintain full employment, and contribute to economic prosperity and welfare, and vested policymaking in a Board combining officials and lay members variously drawn from business, labour, and the academic community. That statute, largely unchanged since 1945, remains in force today. The early 1990s would see a political contest for the Australian central bank, a contest which would see the appropriateness of the Coombsian post War institutional scheme questioned, and the 'New Zealand model' cited as the exemplar of institutional best practice. In 1999 that contest is over, the legislation has not been revisited, the Coombsian scheme remains intact, and it enjoys bi-partisan political support. The institution has been reshaped, but within the context of the Coombsian scheme. The thesis takes as its point of departure the fact of institutional difference, and illuminates the causes and consequences of two markedly different trajectories of institutional reshaping. A most similar systems research strategy provides the methodological framework, with the theoretical base provided by a political economy model which posits that particular institutional configurations and trajectories of institutional reshaping will reflect the relative influence of actors within the political economy. The model seeks to remedy what is a principal deficiency in the rational economics literature, namely the treatment of central bank independence as exogenous. By situating institutional reshaping within the political economy, the nature of choices relating to institutional form and trajectories of institutional reshaping are made endogenous. Elements from both rational-choice and historical institutionalism are imported into the model, which posits that a condition of institutional equilibrium condition will obtain where attributes of the institutional mix serve to maximise endowments of credibility and legitimacy. Credibility of institution and of policy is a requirement in order to remedy any dynamic inconsistency constraint, and typically is advanced by operational independence and a focus on price stability. Institutional and policy legitimacy posits both that independence be balanced with appropriate accountability provisions, and that economic growth, macroeconomic stability and an appropriate measure of policy co-ordination form part of the central bank mandate. Institutional credibility and legitimacy are manifest both in particular attributes of institutional form - policy objectives and governance arrangements in particular - and in the conduct of relations between central banks and actors within the political economy. For the first time, the thesis articulates a comparative political economy of central banking in Australasia, and illuminates the causes and consequences of differing trajectories of institutional reshaping within an integrated model. The thesis advances an explanation for the markedly different trajectories of institutional reshaping, and foreshadows the likely trajectory of future reform under circumstances of institutional dis-equilibrium. The thesis extends and modifies the institutionalist literature on the political economy of central banking, and is an original contribution in keeping with what Sharpf has identified as the positive and normative import of policy research - producing effective and legitimate solutions to policy problems.