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The Intertemporal Cost of Living and Dynamic Inflation: The Case of the Czech Republic

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  • Ivan Sutoris

Abstract

When consumers optimize intertemporally, a true cost of living index will depend on changes in both current and future prices as well as rates of return on financial assets. This paper aims to construct a measure of such "dynamic inflation" for the Czech Republic from a solution to the household's intertemporal consumption-saving problem. Dynamic inflation is derived to be a function of current movements in consumption and house prices as well as revisions to forecasts of the future paths of inflation and interest rates. The resulting series constructed from Czech data roughly follows CPI inflation, but is more volatile and less persistent. Housing booms can cause persistent upward deviations, while changes in expected interest rates have a stabilizing effect. In addition, the intertemporal cost of living can also potentially be affected by low-frequency structural shifts in the economy.

Suggested Citation

  • Ivan Sutoris, 2020. "The Intertemporal Cost of Living and Dynamic Inflation: The Case of the Czech Republic," Working Papers 2020/9, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2020/9
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    References listed on IDEAS

    as
    1. Tomas Havranek & Mojmir Hampl, 2017. "Should Inflation Measures Used by Central Banks Incorporate House Prices? The Czech National Bank's Approach," Research and Policy Notes 2017/01, Czech National Bank.
    2. Jan Frait & Luboš Komárek, 2007. "Monetary Policy and Asset Prices: What Role for Central Banks in New EU Member States?," Prague Economic Papers, Prague University of Economics and Business, vol. 2007(1), pages 3-23.
    3. Shiratsuka, Shigenori, 1999. "Asset Price Fluctuation and Price Indices," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 103-128, December.
    4. W. Erwin Diewert, 2002. "Harmonized Indexes of Consumer Prices: Their Conceptual Foundations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 547-637, December.
    5. Michael F. Bryan & Stephen G. Cecchetti & Roisin O'Sullivan, 2002. "Asset Prices in the Measurement of Inflation," NBER Working Papers 8700, National Bureau of Economic Research, Inc.
    6. Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, vol. 111(472), pages 335-356, June.
    7. Ricardo Reis, 2005. "A Dynamic Measure of Inflation," NBER Working Papers 11746, National Bureau of Economic Research, Inc.
    8. Hiroshi Shibuya, 1992. "Dynamic Equilibrium Price Index: Asset Price and Inflation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 10(1), pages 95-109, February.
    9. Robert A. Pollak, 1975. "The Intertemporal Cost of Living Index," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 4, number 1, pages 179-198, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cost of living; CPI; dynamic inflation; intertemporal optimization;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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