TY  - JOUR
AU  - Reis,Ricardo
TI  - A Dynamic Measure of Inflation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11746
PY  - 2005
Y2  - November 2005
UR  - http://www.nber.org/papers/w11746
L1  - http://www.nber.org/papers/w11746.pdf
N1  - Author contact info:
Ricardo Reis
Department of Economics, MC 3308
Columbia University
420 West 118th Street, Rm. 1022 IAB
New York  NY  10027
Tel: 212-851-4007
Fax: 212-854-8059
E-Mail: rreis@columbia.edu
AB  - This paper shows that conventional measures of cost-of-living inflation, based on static models of consumption, suffer from two problems. The first is an intertemporal substitution bias, as these measures neglect the ability of consumers to borrow and lend in response to price changes. The second problem is the omission of intertemporal prices, which capture relevant relative prices for a consumer who lives for many periods. The paper proposes a dynamic price index (DPI) that solves these problems. Theoretically, it shows that the DPI is forward-looking, responds by more to persistent shocks, includes assets prices, and distinguishes between durable and non-durable goods' prices. A constructed DPI for the United States from 1970 to 2008 differs markedly from the CPI, it is close to serially uncorrelated, it is mostly driven by the prices of houses and bonds, and is twice as high as the CPI in 2008.
ER  -