Modern macroeconomics textbooks rest upon the assumption of a social welfare function defined on inflation, p, and unemployment, U. However, no formal evidence for the existence of such a function has been presented in the literature. Although an optimal policy rule cannot be chosen unless the parameters of the presumed W(p, U) function are known, that has not prevented its use in a large theoretical literature in macroeconomics. This paper has two aims. The first is to show that citizens care about these two variables. We present evidence that inflation and unemployment belong in a well-being function. The second is to calculate the costs of inflation in terms of unemployment. We measure the relative size of the weights attached to these variables in social well-being. Policy implications emerge. Economists have often puzzled over the costs of inflation. Survey evidence presented in Robert J. Shiller (1997) shows that, when asked how they feel about inflation, individuals report a number of unconventional costs, like exploitation, national prestige, and loss of morale. Skeptics wonder. One textbook concludes: “we shall see that standard characterizations of the policy maker’s objective function put more weight on the costs of inflation than is suggested by our understanding of the effects of inflation; in doing so, they probably reflect political realities and the heavy political costs of high inflation” (Blanchard and Fischer, 1989 pp. 567–68). Since reducing inflation is often costly, in terms of extra unemployment, some observers have argued that the industrial democracies’ concern with nominal price stability is excessive—and have urged different monetary policies. This paper proposes a new approach. It examines how survey respondents’ reports of their well-being vary as levels of unemployment and inflation vary. Because the survey responses are available across time and countries, we are able to quantify how self-reported well-being alters with unemployment and inflation rates. Only a few economists have looked at patterns in subjective happiness and life satisfaction. Richard Easterlin (1974) helped to begin the literature. Later contributions include David Morawetz et al. (1977), Robert H. Frank (1985), Ronald Inglehart (1990), Yew-Kwang Ng (1996), Andrew J. Oswald (1997), and Liliana Winkelmann and Rainer Winkelmann (1998). More recently Ng (1997) discusses the measurability of happiness, and Daniel Kahneman et al. (1997) provide an axiomatic defense of experienced utility, and propose applications to economics. Our paper also borders on work in the psychology literature; see, for example, Edward Diener (1984), William Pavot et al. (1991), and David Myers (1993). Section I describes the main data source and the estimation strategy. This relies on a regressionadjusted measure of well-being in a particular year and country—the level not explained by individual personal characteristics. This residual macroeconomic well-being measure is the paper’s focus. * Di Tella: Harvard Business School, Morgan Hall, Soldiers Field, Boston, MA 02163; MacCulloch: STICERD, London School of Economics, London WC2A 2AE, England; Oswald: Department of Economics, University of Warwick, Coventry CV4 7AL, England. For helpful discussions, we thank George Akerlof, Danny Blanchflower, Andrew Clark, Ben Friedman, Duncan Gallie, Sebastian Galiani, Ed Glaeser, Berndt Hayo, Daniel Kahneman, Guillermo Mondino, Steve Nickell, Julio Rotemberg, Hyun Shin, John Whalley, three referees, and seminar participants at Oxford University, Harvard Business School, and the NBER Behavioral Macro Conference in 1998. The third author is grateful to the Leverhulme Trust and the Economic and Social Research Council for research support. 1 See, for example, Olivier Blanchard and Stanley Fischer (1989), Michael Burda and Charles Wyplosz (1993), and Robert E. Hall and John Taylor (1997). Early influential papers include Robert J. Barro and David Gordon (1983). 2 N. Gregory Mankiw (1997) describes the question “How costly is inflation?” as one of the four major unsolved problems of macroeconomics. 3 A recent contribution to this debate in the United States is Paul Krugman’s piece, “Stable Prices and Fast Growth: Just Say No,” The Economist, August 31, 1996.

https://andrewoswald.com/docs/aerfeb2000.pdf

Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness

https://link.springer.com/content/pdf/10.1057%2Fpalgrave.ces.8100210.pdf

Multinational Firms in the World Economy

Unemployment: macroeconomic performance and the labour market

cal dimension: the UK, the EU and the US. The profound recent changes in the industrial relations framework in the UK are described by John Addison and Stanley Siebert. They describe anti-union legislation enacted during the period 19801993 and relate it to the recent decline of unionism. The authors further examine the accession of ‘New Labour’ and its related reform agenda. They also discuss the prospect of new legislation seeking to regulate the employment relation from the level of the European Union and its impact on relevant British legislation.

Growing public - social spending and economic growth since the eighteenth century

This paper studies the inflation and interest rate performances since the late 1970s for six former highinflation countries that adopted inflation targeting (IT) in the early 1990’s. Using Germany, Switzerland and the US for comparison, we look at various aspects of central bank performance in a pre-IT period (1978-92) and a post-IT period (1993-01). The results of all types of evidence considered uniformly lead to the general conclusion that IT has proven a useful strategy for reducing the level and volatility of inflation. However, IT central banks did not outperform the central banks used as reference cases during the second period. We then present an event study of monetary policy comparing inflation and interest rate developments after the 1978 and the 1998 oil price shocks. Here we find that IT central banks realized significantly larger gains in credibility than the central banks in the reference group. . This result corroborates the conclusion that IT is a useful framework for communicating a monetary policy strategy aiming at low inflation rates.

https://www.zei.uni-bonn.de/dateien/working-papaer/B02-01.pdf

Does Inflation Targeting Matter

The gold standard was a system of fixed exchange rates that offered little opportunity for carrying out monetary policies, short of suspending gold convertibility. Trade integration and capital mobility were very high. It is worthwhile asking whether there are useful lessons to draw for EMU from European experience during that period. One clear lesson is that debts matter. Another basic finding is that the stability of the European gold standard depended on the underlying price trend. Deflation prior to 1895 resulted in rising public debt burdens, which forced some countries to leave the system. Once gold was discovered and deflation gave way to inflation, real interest service fell, debts grew more slowly and a high degree of convergence allowed most countries to return to gold. For EMU, this result implies that stability will hinge on the ECB’s policy not being too restrictive. Other lessons concern the fragility of institutions in the face of deep public finance difficulties, the risks for the single market of leaving out countries that have not fully converged, and the existence of a virtuous cycle including low real interest rates, fast growth and debt deccumulation.

https://hal-sciencespo.archives-ouvertes.fr/hal-01037858/document

Stability without a pact? Lessons from the European Gold Standard, 1880-1913

Contents: 1. Forum Economique Franco-Allemand - Deutsch-Franzosisches Wirtschaftspolitisches Forum...1 -- 2. EMU and the Labour Market - A Speculative Assessment - Karl-Heinz Paque...2 -- 3. Tax Competition in the European Monetary Union: Present and Prospects - Jacques Le Cacheux...14 -- 4. Tax Policy under EMU ( Comments on the Paper Presented by Jacques Le Cacheux) - Michel Didier...31

Labour market tax policy in the EMU

Stability pacts

European lessons from the gold standard

The gold standard was a system of fixed exchange rates that offered little opportunity for carrying out monetary policies, short of suspending gold convertibility. Trade integration and capital mobility were very high. It is worthwhile asking whether there are useful lessons to draw for EMU from European experience during that period. One clear lesson is that debts matter. Another basic finding is that the stability of the European gold standard depended on the underlying price trend. Deflation prior to 1895 resulted in rising public debt burdens, which forced some countries to leave the system. Once gold was discovered and deflation gave way to inflation, real interest service fell, debts grew more slowly and a high degree of convergence allowed most countries to return to gold. For EMU, this result implies that stability will hinge on the ECB's policy not being too restrictive. Other lessons concern the fragility of institutions in the face of deep public finance difficulties, the risks for the single market of leaving out countries that have not fully converged, and the existence of a virtuous cycle including low real interest rates, fast growth and debt reduction

— Marc Flandreau, Jacques Le Cacheux and Frederic Zumer

Stability without a pact? Lessons from the European gold standard, 1880—1914

The Stiglitz report on the measurement of economic performance and social progress has been recently released. Part of this report is devoted to the issue of measuring sustainability. One of the sustainability indexes it considers is the concept of adjusted net savings (ANS). Compared to other indexes, it has the advantage of being truly concentrated on measuring sustainability stricto sensu, avoiding a frequent confusion between the measurement of sustainability and the measurement of current well-being. It also relies on an explicit accounting framework, and it includes all potential dimensions of global sustainability: physical and human capital accumulation, as well as changes in quantities or quality of environmental assets. But the major stumbling block is the definition of prices that are needed for valuing these different groups of assets. In a context of notoriously imperfect markets, these prices cannot be observed. They have to be imputed. This paper recalls what are the theoretical requirements for this imputation, and that they are quite strong: what is needed is no less than a full model projecting long term interactions between the economy and the environment. We use this observation as a point of departure for explaining why consensus on sustainability measurement is so difficult to reach, and how this argues in favor of more eclectic approaches mixing the ANS with some complementary indicators focusing on environmental issues.

Adjusted net savings and other approaches to sustaibability: some theoretical backgroud

The EU budget is a reflection of the general state of the European integration process. Widespread dissatisfaction with its current mechanisms and achievements is therefore to be taken seriously. The protracted negotiations on the 2007–2013 EU medium-term financial perspectives, and the almost unanimous, bi-partisan rejection in January 2006 by the European Parliament of the final December 2005 compromise painstakingly built by the EU Council have clearly provided ample evidence of the highly unsatisfactory character of the EU budgetary procedure and its outcomes. Indeed, while reporting on the “success” of the budget negotiations and on the happy end of a stalemate that had started with the failure of the June 2005 Council to agree on the financial perspectives, the December 2005 Council conclusions immediately called for a mid-term review in 2008–2009 and asked the Commission to prepare proposals for a reform of the EU budget resource system. Similarly, while eventually adopting a slightly amended budget proposal after a tri-institutional compromise in April 2006, the European Parliament decided to harden the mandate of the Commission for proposing the creation of a genuine own resource for the EU budget. In its June 2006 Report on the Council decision on the system of the European Communities’ own resources (EU Parliament, 2006), the Parliament explicitly makes the current system of national contributions responsible, at least in part, for what it regards as the unsatisfactory functioning and outcome of the recent European budgetary negotiations: “… the aim of such review should be to reach agreement on a new, comprehensive financial system…, and pointed out that, in particular, the system of own resources as well as the expenditure side needed to be reformed urgently in order to avoid the same painful experience of national bargaining for the next financial framework.” (Amendment to Article 5, italics added).

Jacques Le Cacheux

Papers

Stability without a pact? Lessons from the European Gold Standard, 1880-1913

Labour market tax policy in the EMU

Stability without a pact? Lessons from the European gold standard, 1880—1914

Adjusted net savings and other approaches to sustaibability: some theoretical backgroud

Funding the EU Budget with a Genuine Own Resource: The Case for a European Tax