Abstract
AbstractThe misery index (the unweighted sum of unemployment and inflation rates) was probably the first attempt to develop a single statistic to measure the level of a population’s economic malaise. In this letter, we develop a dynamic approach to decompose the misery index using two basic relations of modern macroeconomics: the expectations-augmented Phillips curve and Okun’s law. Our reformulation of the misery index is closer in spirit to Okun’s idea. However, we are able to offer an improved version of the index, mainly based on output and unemployment. Specifically, this new Okun’s index measures the level of economic discomfort as a function of three key factors: (1) the misery index in the previous period; (2) the output gap in growth rate terms; and (3) cyclical unemployment. This dynamic approach differs substantially from the standard one utilised to develop the misery index, and allow us to obtain an index with five main interesting features: (1) it focuses on output, unemployment and inflatio...
Highlights
Following the well-publicised financial crisis that began in 2007, many of the world’s most advanced economies experienced one of the longest and deepest recessions recorded
We develop a dynamic approach to decompose the misery index using two basic relations of modern macroeconomics: the expectations-augmented Phillips curve and Okun’s law
We are able to offer an improved version of the index, mainly based on output and unemployment. This new Okun’s index measures the level of economic discomfort as a function of three key factors: (1) the misery index in the previous period; (2) the output gap in growth rate terms; and (3) cyclical unemployment. This dynamic approach differs substantially from the standard one utilised to develop the misery index, and allow us to obtain an index with five main interesting features: (1) it focuses on output, unemployment and inflation; (2) it considers only objective variables; (3) it a llows a distinction between short-run and long-run phenomena; (4) it places more importance on output and unemployment rather than inflation; and (5) it weights recessions more than expansions
Summary
Following the well-publicised financial crisis that began in 2007, many of the world’s most advanced economies experienced one of the longest and deepest recessions recorded. In the USA, the Great Recession, as it has come to be known—officially began in December 2007 and ended in June 2009—was the largest macroeconomic downturn since the Great Depression of the 1930s. This set of largely unpredicted and dramatic events refocused the attention of macroeconomists on the determinants of business cycles as well as on the consequences of recessions on individual and community well-being (Grusky, Western, & Wimer, 2011). The misery index combines two fundamental targets of macroeconomic policy (unemployment and inflation) in a basic aggregate disutility function. This function measures the level of economic discomfort as the unweighted sum of unemployment and inflation rates (Mankiw, 2010)
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