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Approximating the Cost-of-Living Index for a Storable Good†

Approximating the Cost-of-Living Index for a Storable Good† AbstractThis paper estimates a cost-of-living index using a dynamic structural model for two storable product categories. In each category, regime shifts to higher or lower retail prices are observed. Fixed-base indexes do a poor job of capturing changes in welfare after a regime shift, and deviate from the dynamic index by as much as 300 percent. I evaluate the extent to which two recently proposed indexes can approximate the model-derived index. These indexes improve welfare measurement and are straightforward to compute. The category’s competitive structure and features of the regime shift determine which of the two provides a better approximation. (JEL C43, C51, E31, L11) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

Approximating the Cost-of-Living Index for a Storable Good†

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Publisher
American Economic Association
Copyright
Copyright © 2018 © American Economic Association
ISSN
1945-7685
DOI
10.1257/mic.20140254
Publisher site
See Article on Publisher Site

Abstract

AbstractThis paper estimates a cost-of-living index using a dynamic structural model for two storable product categories. In each category, regime shifts to higher or lower retail prices are observed. Fixed-base indexes do a poor job of capturing changes in welfare after a regime shift, and deviate from the dynamic index by as much as 300 percent. I evaluate the extent to which two recently proposed indexes can approximate the model-derived index. These indexes improve welfare measurement and are straightforward to compute. The category’s competitive structure and features of the regime shift determine which of the two provides a better approximation. (JEL C43, C51, E31, L11)

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: May 1, 2018

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