Do preferences shape institutions? The case of inflation aversion and inflation targeting

• We estimate the relation between measures of self-reported well being and country-specific levels of inflation in a sample of Latin American countries.
• We interpret this relation as a measure of preferences for inflation.
• Inflation aversion is shown to be a strong predictor of whether or not a country adopted the inflation targeting monetary regime.
• This relation is robust to the inclusion of a set of controls used in the literature that studies the determinants of inflation targeting.

We show that preferences, estimated with subjective measures of individual well-being, help to explain the adoption of certain types of institutions. In particular, we show that countries exhibiting greater inflation aversion are more likely to adopt the inflation targeting monetary regime.