Monetary policy and happiness: Preferences over inflation and unemployment in Latin America

Using subjective well-being survey data for Latin America, we present evidence that both inflation and unemployment reduce well-being; where the cost of inflation in terms of unemployment, hence the relative size of the weights in a social well-being functions, is about one to eight, almost double of that found for OECD countries. The trade-off, and therefore the misery index, differs across subgroups. For example, the young and left-leaning citizens are more concerned with unemployment than inflation.

Research highlights▶Monetary policy professionals argue that central banks in Latin America should adopt inflation targeting. They assume a social loss welfare function dependent only on inflation. We show, using a well-being survey, Latin-Barometer that the cost of inflation in terms of unemployment is one to eight, almost double of that found for OECD countries. In addition, the trade-off is larger for the young and left-leaning citizens, both increasing proportion of the population, who are more concerned with unemployment. Thus, advocates of inflation only targeting are, and increasingly so, divorced from the well-being of LAC citizens.