Measuring Aggregate Price Indexes with Taste Shocks: Theory and Evidence for CES Preferences / Stephen J. Redding, David E. Weinstein.

Format:

Book

Author/Creator:

Redding, Stephen J.

Contributor:

National Bureau of Economic Research.

Weinstein, David E.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22479.

NBER working paper series no. w22479

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Measuring Aggregate Price Indexes with Taste Shocks

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

We develop an approach to measuring the cost of living for CES preferences that treats demand shocks as taste shocks that are equivalent to price shocks. In the presence of relative taste shocks, the Sato-Vartia price index is upward biased because an increase in the relative consumer taste for a variety lowers its taste-adjusted price and raises its expenditure share. By failing to allow for this association, the Sato-Vartia index underweights drops in taste-adjusted prices and overweights increases in taste-adjusted prices, leading to what we term a "taste-shock bias." We show that this bias generalizes to other invertible demand systems.

Notes:

Print version record

August 2016.