NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Measuring Aggregate Price Indexes with Demand Shocks: Theory and Evidence for CES Preferences

Stephen J. Redding, David E. Weinstein

NBER Working Paper No. 22479
Issued in August 2016, Revised in May 2018
NBER Program(s):International Trade and Investment

We develop a new approach to measuring the cost of living for constant elasticity of substitution (CES) preferences. Our approach allows for demand shocks for individual goods (to rationalize micro data) while preserving a money-metric expenditure function (to compare the cost of living over time). We develop a new “reverse-weighting” estimator of the elasticity of substitution between goods and provide upper and lower bounds to the true parameter value. We show that abstracting from demand shocks introduces a “consumer-valuation bias,” which is analogous to the well-known “substitution bias,” and results in a substantial overestimate of the increase in the cost of living over time.

download in pdf format
   (781 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22479

Users who downloaded this paper also downloaded* these:
Nakamura, Steinsson, Sun, and Villar w22505 The Elusive Costs of Inflation: Price Dispersion during the U.S. Great Inflation
Antràs, de Gortari Briseno, and Itskhoki w22676 Globalization, Inequality and Welfare
Kucheryavyy, Lyn, and Rodríguez-Clare w22484 Grounded by Gravity: A Well-Behaved Trade Model with Industry-Level Economies of Scale
Leeper and Leith w21867 Understanding Inflation as a Joint Monetary-Fiscal Phenomenon
Chodorow-Reich and Wieland w21864 Secular Labor Reallocation and Business Cycles
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us