"It is with considerable reluctance that I have issued these proceedings, but I cannot leave Mr Shadbolt's attack on my reputation to remain unchallenged," she said.
Ms Arnold was elected to the Invercargill City Council in October 2013.
She said defamation specialists Peter McKnight and Ali Romanos will act for her in relation to the proceeding.
Mr Shadbolt was not available for comment immediately.
Tim Shadbolt: protester turned politician
• In the 60s, Shadbolt made his name baiting authorities as a vocal protester on issues from the Vietnam War to the Springbok tour.
• He was arrested 33 times during political protests as a prominent member of the radical Progressive Youth Movement, most famously for using the word "Bullshit".
• In the early 70s, Shadbolt became editor of the university newspaper Craccum and helped to establish a commune at Huia.
• He has competed in Dancing with the Stars, appeared on comedy news show 7 Days and The Weakest Link as well as having cameos in The World's Fastest Indian, Two Little Boys and Utu.
• In the 90s, he appeared in an advertisement promoting New Zealand cheese, where he said "I don't care where, as long as I'm mayor".
• In 2012 he set a new world record with a 26-hour-long interview on Southland's Cue TV. The live stream was viewed around the world from the United States to Japan and Qatar.
• Shadbolt first became the Mayor of Waitemata City in 1983. He famously celebrated by towing his concrete mixer in the Henderson Christmas Parade.
• He lost the position in 1989 when the area was expanded and renamed Waitakere. During his term he became infamous for twice losing the mayoral chains.
• Following the death of Invercargill's mayor in 1993, Shadbolt was invited to run and claimed a surprising victory.
• In 1999 he dipped into the rarely-used mayoral contingency fund to save the lives of 17 half-starved Auckland Island pigs after being approached by the Rare Breed Society.
• He became the longest serving city mayor in New Zealand's history in 2013 - when he was reinstated a seventh time in Invercargill by 12,000 votes.