The horizontalist debate: Lessons from New Zealand

Abstract

After the first international oil price shock in 1973, New Zealand experienced a period of deepening stagflation. The number of registered unemployed, for example, jumped from just 1,200 in 1973 to 77,000 in 1984. The government's response was to increase its intervention in the economy, so that when inflation stubbornly remained above 15 per cent in the early 1980s, Prime Minister Sir Robert Muldoon introduced a freeze on all prices in the domestic economy, including wages, salaries, interest rates and exchange rates. The general price freeze remained in place from June 1982 to February 1984, and the exchange-rate freeze was still in place when Sir Robert called an early general election in the middle of 1984. There was a sustained outflow of capital from New Zealand during the four­ week election campaign, since investors correctly recognized that currency devaluation had become inevitable.