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

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  • Matthew Osborne

Abstract

This 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.

Suggested Citation

  • Matthew Osborne, 2018. "Approximating the Cost-of-Living Index for a Storable Good," American Economic Journal: Microeconomics, American Economic Association, vol. 10(2), pages 286-314, May.
    • Handle: RePEc:aea:aejmic:v:10:y:2018:i:2:p:286-314
    Note: DOI: 10.1257/mic.20140254
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    References listed on IDEAS

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    Cited by:

    1. Kozo Ueda & Kota Watanabe & Tsutomu Watanabe, 2020. "Consumer Inventory and the Cost of Living Index: Theory and Some Evidence from Japan," Working Papers on Central Bank Communication 025, University of Tokyo, Graduate School of Economics.
    2. Tsutomu Watanabe & Tomoyoshi Yabu, 2023. "The demand for money at the zero interest rate bound," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(6), pages 968-976, September.
    3. Kozo Ueda & Kota Watanabe & Tsutomu Watanabe, 2021. "Household Inventory, Temporary Sales, and Price Indices," CARF F-Series CARF-F-520, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Fabio Antoniou & Raffaele Fiocco, 2023. "Storable Good Market With Intertemporal Cost Variations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(1), pages 361-385, February.
    5. Ludwig von Auer, 2024. "Inflation Measurement in the Presence of Stockpiling and Smoothing of Consumption," Research Papers in Economics 2024-02, University of Trier, Department of Economics.
    6. Minjung Kwon & Tülin Erdem & Masakazu Ishihara, 2023. "Counter-cyclical price promotion: Capturing seasonal changes in stockpiling and endogenous consumption," Quantitative Marketing and Economics (QME), Springer, vol. 21(4), pages 437-492, December.
    7. Ueda, Kozo, 2020. "Dynamic cost of living index for storable goods," Economics Letters, Elsevier, vol. 189(C).

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    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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