The designation puts the city on the world map as a first-class literary centre, Dunedin Mayor Dave Cull said.
It would help the city attract cultural tourism, tertiary students and new residents, he said.
One of Dunedin's first steps as a City of Literature will be to organise an international conference related to literary culture.
Dunedin was one of four newly designated Cities of Literature - the others were Granada, in Spain, Heidelberg, in Germany, and Prague, in the Czech Republic.
They join existing Cities of Literature Edinburgh, Melbourne, Iowa City, Dublin, Reykjavik, Norwich and Krakow. A country can only have one Unesco City of Literature.
The designation showed the city was ''up there'' with other culturally significant cities, and was not a ''colonial outpost'', Mr Cull said.
Coming soon after the city was named the first Gigatown, the designation was further evidence that Dunedin was moving forward, he said.
Dunedin's application highlighted its literary heritage, literary events, institutions and organisations, and its community or writers, playwrights and lyricists.
''It gives us another point of difference,'' Mr Cull said.
''At a local and national level, this announcement will have cultural and economic benefits.
''The value of having a rich culture is evidenced by events such as this year's inaugural Dunedin Writers and Readers Festival, which had an unexpected number of soldout events, and attracted authors with an international profile.
''Being a City of Literature is a great brand and a very fitting one, given that Robbie Burns' statue presides over our central city.''
Dunedin City Council arts and culture group manager Bernie Hawke said six of the existing Cities of Literature backed the bid, and Dunedin was particularly grateful for the support of its sister city, Edinburgh.
''We have been wonderfully supported internationally and locally by writers' groups and trusts, and national writing and publishing associations, as well as the University of Otago.''