Opposition parties characterised the move as a politically motivated hit-job designed to land in the heat of an election campaign. But ministers from across the coalition denied any ulterior motives.
The review - to be released in September - will focus on the central bank's actions, including cutting the official cash rate to 0.25% and engaging in money printing.
It would also look at the coordination of monetary and fiscal policy - that is, how the bank's response interacted with the government's.
Finance Minister Nicola Willis said the review's purpose was to identify any key lessons, in light of the associated spike in inflation and house prices.
"The Reserve Bank of New Zealand took unprecedented action in response to the Covid-19 pandemic," Willis said.
"These actions helped to preserve jobs and keep businesses afloat, but the indirect impacts included decades-high inflation, and losses of about $10.3 billion on the LSAP [Large Scale Asset Purchase] programme and a significant spike in asset values with house prices increasing 30% in one year."
In October, Reserve Bank chief economist Paul Conway told a Sydney investment conference the LSAP scheme, commonly referred to as money printing, had effectively paid for itself and helped the economy to function at a time of stress.
"By boosting economic activity during the pandemic, LSAPs increased government tax revenues," Conway said.
"This higher revenue almost entirely covered the direct losses from LSAPs, leaving consolidated crown debt virtually unchanged over the medium term."
Other commentators have strongly criticised the LSAP programme, the cost and the related programme of $19b of cheap loans to banks.
RBNZ welcomes review; opposition parties cry foul
In a statement, the new RBNZ governor Dr Anna Breman said she welcomed the review and looked forward to its insights.
"I am proud to lead an institution that is open to learning from its past actions."
Breman, however, pointed to an existing RBNZ review which found the money printing programme was "successful in correcting financial market dysfunction and reducing long-term interest rates".
She noted that those findings were "peer reviewed by international experts".
"The review also found that in hindsight, earlier, or stronger monetary tightening could have curbed the subsequent hike in inflation."
Breman was appointed for a five-year term as governor, beginning in December last year. She was appointed following the early departure of Adrian Orr.
Labour leader Chris Hipkins said the announcement showed the coalition was getting desperate and trying to re-energise the "Covid-19 conspiracy theorists".
"This is another exercise in cynical political manipulation by Nicola Willis," Hipkins said.
"If she really wanted to know whether the Reserve Bank had handled the pandemic accurately, she would have launched this inquiry when she became Minister of Finance, not right in the middle of an election campaign."
Green co-leader Chlöe Swarbrick said the timing was "real sus" and suggested the government had "quite dodgy motivations".
"The government could have and should have instigated this inquiry at the beginning of their term ... We all do deserve a meaningful and informed public debate.
"However, I think the timing of this does not indicate that that is the intention of this government."
The government's defence
Willis denied the review was politically motivated and said it was simply about "learning the lessons of history".
"If it is the case that the Reserve Bank's actions, overseen by the last government, led to financial harm to New Zealanders, should I hide that information from New Zealanders? Absolutely not.
"If they made mistakes, New Zealanders deserve to know."
Asked why she had not initiated the review earlier, Willis said she'd had a significant "work agenda" with the Reserve Bank this term, including refreshing its governance.
"The timing is great, because we have a new governor, we have a refreshed board, we have a refreshed monetary policy committee, and I can tell you: they are open to examining these questions."
Prime Minister Christopher Luxon said it was "quite right" to take a closer look at the Reserve Bank's "excessive printing of cash".
"New Zealand cannot go through the experience it went through where economic chaos and carnage was caused and actually not ask some questions."
Deputy Prime Minister and ACT leader David Seymour said the review was "absolutely the right thing to do".
"During Covid, the Reserve Bank lost its mind and we're still paying for it. They were printing money to prop up the government's Covid response," Seymour said.
"Not everyone believes me, so maybe it's worth having a few other people point out that if you abandon sensible economics in a crisis you end up poorer."
Taxpayers' Union spokesperson James Ross said the review was "long overdue" and should have the full legal powers of a government inquiry.
"This cannot be a once-over-lightly desktop exercise. It must be a forensic examination that produces a practical blueprint to prevent a repeat of this economic disaster. The public deserve nothing less."
Monetary policy experts Athanasios Orphanides and David Archer have been appointed to carry out the independent review.
Orphanides was a former governor of the Central Bank of Cyprus and member of the Governing Council of the European Central Bank.
Archer was a former Reserve Bank assistant governor and former head of the Central Banking Studies Unit at the Bank for International Settlements.
