yield on new zealand government new zealand dollar long - term bonds and that on us treasuries. in the mid - eighties, that spread had peaked at around 1000 basis points. by early 1990, that spread had reduced to around 400 basis points, and it has been well under 200 basis points for most of the last decade. of course, most of that reduction in spreads was presumably simply the result of new zealand's greatly improved inflation performance, but that improved performance was, as i have argued, in part attributable to the inflation targeting framework, while that framework probably also helped, at the margin, to convince markets that low inflation was likely to endure. an inflation target agreed by governor and minister in new zealand's experience, the fact that the inflation target was, and still is, formally agreed between the governor of the central bank and the minister of finance on behalf of the government has been unambiguously positive. and i make this point because some observers have suggested that this need to agree the inflation target between central bank and executive / legislature is an undesirable restraint on central bank independence. there is no question that it is, in principle, a restraint. in our framework, the inflation target is formally agreed between minister and governor, and can be changed either by mutual agreement or by the minister unilaterally ( if the governor does not agree to a change ) by the use of the so - called override provision in the legislation. but, in a world of open capital markets, the fact that the legislation requires the policy targets agreement, or any override of that agreement, to be in the public domain means that no minister can manipulate the target for cynical political ends. on the contrary, the minister has every incentive to make it publicly clear that the inflation target he wants the central bank to deliver is consistent with price stability and a stable currency. indeed, it is this obligation to be transparent about the objectives of policy, and about the modus operandi of policy, that is one of the most important aspects of the new zealand inflation targeting framework, arguably as important as instrument independence itself. if a minister were, say, to instruct the bank to ignore the inflation rate and focus instead on increasing the growth rate - as he could do by invoking the override provision - markets would almost certainly deliver an immediate increase in interest rates across almost the entire yield curve ( the bank would still, of course, be able to anchor the overnight

rate ), together with a sharp fall in the exchange rate. the need to be transparent ties the hands of both government and central bank unless there are good and explainable reasons for change. the fact that the inflation target is a matter agreed between minister and governor has effectively protected the bank from criticism by the government, and in the almost 14 years during which inflation targeting has been in place, the number of government ministers who have attacked the bank can be counted on the fingers of one hand. given that the minister of finance is involved in agreeing the inflation target, it is not easy for him or other ministers to attack the bank for having policy too tight unless inflation is, or looks likely to be, below the target. of course, we are not fully protected from criticism, even from the government : given the long lags with which monetary policy operates, and the inherent uncertainty, we may still be criticized for the timing or magnitude of policy moves, though in practice that has been a very unusual event in our experience. moreover, agreeing the target between the minister and the governor has the important indirect effect of improving the consistency of monetary and fiscal policies while still leaving the central bank with instrument independence. by agreeing the inflation target with the governor, the minister of finance is implicitly agreeing that if fiscal policy is changed, monetary policy may need to change also, potentially offsetting any stimulus ( or restraint ) emanating from fiscal policy. we saw this most dramatically in mid - 1990 when the minister announced an expansionary budget just months before the general election scheduled for late that year. markets were concerned about the loosening in fiscal policy, and became uneasy about the future direction of policy. this was reflected in a rise in long - term interest rates and a fall in the exchange rate, to which we responded by tightening monetary policy. immediately, an editorial in new zealand's largest daily paper noted that the budget had " rekindled inflationary expectations. the ( reserve bank ) was bound to lift interest rates.... electors are frequently bribed to their ultimate cost. this time the independence of responsible monetary control quickly exposes a fiscal fraud. " the main opposition party campaigned in the election on a commitment to get interest rates reduced, not by leaning on the central bank but by " giving monetary policy some mates " through tighter fiscal policy and deregulation of the labour market. five years later, with several years of fiscal surplus behind it, the government undertook to reduce income taxes subject to