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Decomposing the misery index: A dynamic approachCohen, I.K., Ferretti, F., McIntosh, Bryan 19 November 2014 (has links)
Yes / The 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 inflation; (2) it considers only objective variables; (3) it allows
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.
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