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Using a price-dependent utility function to construct price indices

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  • Uliyanov, Igor

Abstract

The purpose of this paper is to incorporate a price-dependent utility function into the theory of price indices. The results presented in the paper provide justification for incorporating relative prices into a consumption aggregate for solving the household’s optimization problem. Using a proposed CES aggregator, a simple model to approximate the conventional geometric price indices has been developed. The model provides the channels of convergence between the axiomatic, stochastic and economic approaches to index number theory. Numerical results based on data published by the Office for National Statistics are presented to confirm the validity of the model

Suggested Citation

  • Uliyanov, Igor, 2024. "Using a price-dependent utility function to construct price indices," MPRA Paper 120304, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:120304
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    File URL: https://mpra.ub.uni-muenchen.de/120304/1/MPRA_paper_120304.pdf
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    References listed on IDEAS

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    4. Peter J. Klenow & Jonathan L. Willis, 2016. "Real Rigidities and Nominal Price Changes," Economica, London School of Economics and Political Science, vol. 83(331), pages 443-472, July.
    5. Quiggin, John, 1994. "Regret Theory with General Choice Sets," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 153-165, March.
    6. Lloyd, P J, 1975. "Substitution Effects and Biases in Nontrue Price Indices," American Economic Review, American Economic Association, vol. 65(3), pages 301-313, June.
    7. Balasko, Yves, 2003. "Economies with price-dependent preferences," Journal of Economic Theory, Elsevier, vol. 109(2), pages 333-359, April.
    8. Pollak, Robert A, 1977. "Price Dependent Preferences," American Economic Review, American Economic Association, vol. 67(2), pages 64-75, March.
    9. Diewert, W Erwin, 1978. "Superlative Index Numbers and Consistency in Aggregation," Econometrica, Econometric Society, vol. 46(4), pages 883-900, July.
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    More about this item

    Keywords

    Consumption aggregator with price-dependent weights; Price index with price-dependent preferences;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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