The Reserve Bank of New Zealand Monetary Policy Amendment Act (2018) gives it 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.
New research by Motu 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.
“What is very clear is that unemployment and inflation both reduce well-being” said Robert MacCulloch, one of the authors of the paper. “but the relative size of the affects varies greatly and completely depends on how well-being is measured.”
There is an opportunity here for the RBNZ to focus more of its research efforts on collecting these kinds of data. In particular, the data should be sufficiently refined to enable one to distinguish between the potentially differing effects of monetary and banking policies across different groups of people. At the same time, the Government also faces a challenge in terms of better defining what aspect of well-being they would like the RBNZ to promote.
The Motu Working Paper, “How does Monetary Policy affect welfare?” by Lina El-Jahel, Robert MacCulloch and Hamed Shafiee is available on the Motu website.