Pavel Luengas () (Office of Evaluation and Oversight at the Interamerican Development Bank.) Inder J. Ruprah () (Office of Evaluation and Oversight at the Interamerican Development Bank.)
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It 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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Paper provided by Inter-American Development Bank, Office of Evaluation and Oversight (OVE) in its series OVE Working Papers with number
0209.
Find related papers by JEL classification: I31 - Health, Education, and Welfare - - Welfare and Poverty - - - General Welfare 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
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
David G. Blanchflower, 2007.
"International Evidence on Well-Being,"
NBER Chapters,
in: Measuring the Subjective Well-Being of Nations: National Accounts of Time Use and Well-Being
National Bureau of Economic Research, Inc.
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