Should Central Banks Target Happiness?: Evidence from Latin America
Jan 2009
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 working paper, using subjective well-being survey data for Latin America the authors 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 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.