A Dynamic Measure of Inflation / Ricardo Reis.

Format:

Book

Author/Creator:

Reis, Ricardo.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11746.

NBER working paper series no. w11746

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

This paper shows that conventional measures of cost-of-living inflation, based on static models of consumption, suffer from two problems. The first is an intertemporal substitution bias, as these measures neglect the ability of consumers to borrow and lend in response to price changes. The second problem is the omission of intertemporal prices, which capture relevant relative prices for a consumer who lives for many periods. The paper proposes a dynamic price index (DPI) that solves these problems. Theoretically, it shows that the DPI is forward-looking, responds by more to persistent shocks, includes assets prices, and distinguishes between durable and non-durable goods' prices. A constructed DPI for the United States from 1970 to 2008 differs markedly from the CPI, it is close to serially uncorrelated, it is mostly driven by the prices of houses and bonds, and is twice as high as the CPI in 2008.

Notes:

Print version record

November 2005.