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Commensurability and Characterization of Normalization Conditions for Cost-of-Living Comparisons under Time-Varying CES Preferences

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  • Abe, Naohito
  • Rao, D.S. Prasada

Abstract

We show that the normalization conditions for a CES utility function with time-varying preferences (Redding and Weinstein, 2020) must be of weighted-geometric mean form to ensure commensurability of price indexes, and numerically illustrate failure of additive normalization to satisfy commensurability.

Suggested Citation

  • Abe, Naohito & Rao, D.S. Prasada, 2024. "Commensurability and Characterization of Normalization Conditions for Cost-of-Living Comparisons under Time-Varying CES Preferences," Economics Letters, Elsevier, vol. 244(C).
    • Handle: RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524005020
    DOI: 10.1016/j.econlet.2024.112018
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    References listed on IDEAS

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    1. Colin J. Hottman & Stephen J. Redding & David E. Weinstein, 2016. "Quantifying the Sources of Firm Heterogeneity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1291-1364.
    2. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    3. Stephen J Redding & David E Weinstein, 2020. "Measuring Aggregate Price Indices with Taste Shocks: Theory and Evidence for CES Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 503-560.
    4. Carluccio, Juan & Gautier, Erwan & Guilloux-Nefussi, Sophie, 2023. "Dissecting the impact of imports from low-wage countries on inflation," European Economic Review, Elsevier, vol. 160(C).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cost of living price index; Preference heterogeneity; Commensurability; Normalization;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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