According to the 1989 Act, the ‘primary function of the [Reserve] Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices’. There was no mandate to pursue additional objectives such as full employment or economic growth. As well as striving for stable prices, the RBNZ was required to promote the systemic stability and efficiency of the financial sector. Responsibility for monetary policy operations lay with the governor alone. The governor was appointed by the government for a five-year term, but could not take office until he or she had negotiated a Policy Targets Agreement (PTA) with the minister of finance. The PTA gave precision to the central bank’s primary objective, and in practice was couched in terms of an inflation target. After signing the PTA, the governor was free to take whatever policy actions were necessary to attain the target. All operational decisions were made by the governor, who was advised by a staff monetary policy committee. The governor’s performance vis-à-vis the PTA target was monitored by the RBNZ’s directors in consultation with the minister of finance. Any breach of the target would have to be explained, and in the worst case the governor could be dismissed. The government could override the PTA in an emergency - a suggestion of Goodhart - but would have to do so openly and not in secret. The governor was obliged to report to the public on the Bank’s activities and plans, for example through regular monetary policy statements and appearances before a Parliamentary committee (Dawe 1990). Under the 1989 Act the objectives of the RBNZ were much more transparent than before. There was no leeway for time inconsistent actions. As the 1989 Act was so radical, the increase in transparency helped to secure its legitimacy. The Act also addressed resource use by requiring the governor and the minister to negotiate a funding agreement, setting out the central bank’s permit¬ted expenditure. Excess expenditure would be scrutinised by the board and Parliament. Management became much more focused on operat¬ing efficiently (Singleton et al. 2006: ch. 8).

The changes to objective setting, accountability, and internal financial management were similar to those faced by state agencies in New Zealand. Several innovative features deserve comment. The 1989 Act distinguished between goal and operational independence in anticipation of Debelle and Fischer (1994). The contractual nature of the relationship between the governor and the minister helped to spark academic debate on central bank contracts (Walsh 1995b). New Zealand’s solution to the problems of central bank accountability and incentives was praised by a leading academic (Walsh 1995a). Don Brash, who became governor in 1988, was at first surprised at the extent of his personal responsibility under the forthcoming legislation. The minister told him: ‘We can’t fire the whole Bank. Realistically, we can’t even fire the whole Board. But we sure as hell can fire you’ (Brash 2002: 66). However, when the RBNZ exceeded its inflation target several times in the mid 1990s, Brash was let off with a caution (Singleton et al. 2006: 184-92).