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How does monetary policy affect welfare?


Lina El-Jahel

Robert MacCulloch

Hamed Shafiee

Date published

30 June 2020

The Reserve Bank of New Zealand (RBNZ) Monetary Policy Amendment Act (2018) gave the bank a new aim of promoting “the prosperity and well-being of New Zealanders …” via the implementation of monetary policy directed at “achieving and maintaining stability in the general level of prices … and supporting maximum sustainable employment”.

The two variables specified in the RBNZ’s dual mandate are employment and inflation.

This working paper works out by how much each of these two variables affects self-reported well-being in New Zealand. This paper measures these variables using two different dimensions of well-being.

The first is Cantril’s Ladder of Life, which measures life satisfaction by first asking the respondent to imagine their life in the best possible light and to describe their hopes and wishes for the future.

The second captures the quality of an individual’s (either pleasant or unpleasant) day-to-day experiences, such as joy or sadness. Whereas the former has a long-time horizon, the latter’s focus is more on the short-term.

This paper finds that unemployment and inflation both reduce well-being although the relative size of the effects depends on how well-being is measured. An implication is that the New Zealand Government should better define what aspect of well-being it would like the RBNZ to promote in order to implement its statutory objective.



How does monetary policy affect welfare?


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