Should Central Banks Target Happiness? Evidence from Latin America
AbstractIt has become common wisdom amongst monetary policy professionals that central banks in Latin America should adopt inflation targeting. Pure inflation targeting implicitly assumes a social loss welfare function dependent on only inflation. In this paper using subjective well-being survey data for Latin America we present evidence that both inflation and unemployment reduce wellbeing; where the cost of inflation in terms of unemployment, hence the relative size of the weights in a social well-being function, is about one to eight, almost double of that found for OECD countries. The weighted misery index differs in level (is higher) and change (an increase rather than a fall) from the commonly used unitary weighted index and from that of the pure inflation targeters for the period 1997 to 2006. In addition, the trade-off—and therefore the misery index—differs across subgroups, for example the young (aged 18-24 years) and left-leaning citizens are more concerned with unemployment than inflation. Thus advocates and practioners of inflation only targeting are, and increasingly so, divorced from the wellbeing of LAC citizens who are increasingly left leaning and with the youth, who given the population pyramid, are also increasing as a proportion of the population. The evidence presented in this paper, combined with the low frequency of happiness data, may not be sufficiently convincing for central banks to adopt happiness-targeting rule. However, happiness data would be useful to inform policy makers regarding the optimal disinflation policy or at least allow consciousness of the potential discontent of different sub-groups of the population of different disinflation strategies.
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Bibliographic InfoPaper provided by Inter-American Development Bank, Office of Evaluation and Oversight (OVE) in its series OVE Working Papers with number 0209.
Length: 24 pages
Date of creation: Jan 2009
Date of revision:
Happiness; Life Satisfaction; Inflation; Unemployment; and Misery Index;
Find related papers by JEL classification:
- I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
- D60 - Microeconomics - - Welfare Economics - - - General
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-17 (All new papers)
- NEP-CBA-2009-06-17 (Central Banking)
- NEP-HAP-2009-06-17 (Economics of Happiness)
- NEP-MON-2009-06-17 (Monetary Economics)
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