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Should Central Banks Target Happiness? Evidence from Latin America

  • 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.)

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.

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Length: 24 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:idb:ovewps:0209
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  1. Justin Wolfers, 2003. "Is Business Cycle Volatility Costly? Evidence from Surveys of Subjective Wellbeing," NBER Working Papers 9619, National Bureau of Economic Research, Inc.
  2. David G. Blanchflower, 2009. "International Evidence on Well-Being," NBER Chapters, in: Measuring the Subjective Well-Being of Nations: National Accounts of Time Use and Well-Being, pages 155-226 National Bureau of Economic Research, Inc.
  3. Betsey Stevenson & Justin Wolfers, 2008. "Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(1 (Spring), pages 1-102.
  4. Michael Woodford, 2001. "Inflation Stabilization and Welfare," NBER Working Papers 8071, National Bureau of Economic Research, Inc.
  5. Robert J. MacCulloch & Rafael Di Tella & Andrew J. Oswald, 2001. "Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness," American Economic Review, American Economic Association, vol. 91(1), pages 335-341, March.
  6. Rafael Di Tella & Robert MacCulloch, 2006. "Some Uses of Happiness Data in Economics," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 25-46, Winter.
  7. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-38, May.
  8. David G. Blanchflower, 2007. "Is Unemployment More Costly Than Inflation?," NBER Working Papers 13505, National Bureau of Economic Research, Inc.
  9. Moura, Marcelo L. & de Carvalho, Alexandre, 2010. "What can Taylor rules say about monetary policy in Latin America?," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 392-404, March.
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