Intertemporal Consumption and the Measurement of Inflation: A Dynamic Inertial Price Index

Fiaschetti, Maurizio; Marini, Giancarlo; Scaramozzino, Pasquale

Abstract

This paper develops a new price index (DIPI) and discusses its characteristics and dynamics. By allowing for habit formation and inertia, our model extends typical dynamic indexes that have a forward looking component, thus providing a more effective support for the design of policy measures. We calculate the DIPI for a sample of goods for the US and prove its effectiveness in tracking business cycle, thus resulting in a more reliable indicator for the design of policy measures. Comparison with the official inflation measure matches the results of the Boskin Commission, which argues that CPI overestimates inflation.

Citation

Fiaschetti, M., Marini, G., & Scaramozzino, P. Intertemporal Consumption and the Measurement of Inflation: A Dynamic Inertial Price Index. London

• Working Paper Type: Working Paper
• Deposit Date: Oct 1, 2018
• Publicly Available Date: Oct 1, 2018
• Pages: 1-21
• Keywords: Consumer price index, cost-of-living index, habit formation, inflation, monetary policy
• Related Public URLs: https://www.cefims.ac.uk/research/papers/DP143/