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Real Income, Unemployment and Subjective Well-Being: Revisiting the Costs and Benefits of Inflation Reduction in Canada

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  • Roderick Hill
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    Abstract

    The benefits of disinflation have often been thought of as the discounted value of the net income increases that might result. This weighs lower incomes from higher short-term unemployment against expected long-term income increases. Such measures of economic welfare typically find large net gains from disinflation. However, studies of subjective well-being show that this overstages gains in individuals' well-being because unemployment has significant non-monetary costs, while higher average incomes may not be associated with significant increases in average well-being. A simulation of the 1990s disinflation in Canada shows that a net loss in average well-being could result. Only if lower inflation raises well-being directly are significant net gains possible.

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    Bibliographic Info

    Article provided by University of Toronto Press in its journal Canadian Public Policy.

    Volume (Year): 26 (2000)
    Issue (Month): 4 (December)
    Pages: 399-414

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    Handle: RePEc:cpp:issued:v:26:y:2000:i:4:p:399-414

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    1. Pierre Fortin, 1996. "The Great Canadian Slump," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 761-87, November.
    2. Blanchflower, David G. & Oswald, Andrew J., 2001. "Well-Being Over Time in Britain and the USA," The Warwick Economics Research Paper Series (TWERPS) 616, University of Warwick, Department of Economics.
    3. Robert J. Shiller, 1996. "Why Do People Dislike Inflation?," Cowles Foundation Discussion Papers 1115, Cowles Foundation for Research in Economics, Yale University.
    4. Di Tella, Rafael & MacCulloch, Robert J. & Oswald, Andrew J., 2001. "The Macroeconomics of Happiness," The Warwick Economics Research Paper Series (TWERPS) 615, University of Warwick, Department of Economics.
    5. Oswald, A.J., 1997. "Happiness and Economic Performance," Papers 18, Centre for Economic Performance & Institute of Economics.
    6. Charles Freedman & Tiff Macklem, 1998. "A Comment on "The Great Canadian Slump"," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 646-665, August.
    7. Wayne Simpson & Norman E. Cameron & Derek Hum, 1998. "Is Hypoinflation Good Policy?," Canadian Public Policy, University of Toronto Press, vol. 24(3), pages 291-308, September.
    8. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Working Papers 98-15, Bank of Canada.
    9. Guy Debelle, 1996. "The Ends of Three Small Inflations: Australia, New Zealand and Canada," Canadian Public Policy, University of Toronto Press, vol. 22(1), pages 56-78, March.
    10. Daniel L. Thornton, 1996. "The costs and benefits of price stability: an assessment of Howitt's rule," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 23-38.
    11. Easterlin, Richard A., 1995. "Will raising the incomes of all increase the happiness of all?," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 35-47, June.
    12. Winkelmann, Liliana & Winkelmann, Rainer, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 65(257), pages 1-15, February.
    13. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
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