The cost-of-living index in a cash and credit goods economy

Abstract

Abstract This study constructs a cost-of-living index in a cash-credit goods economy. I first argue that the conventional cost-of-living index entails internal inconsistency when applied to the cash-credit goods economy and then develop an internally consistent cost-of-living index. This new index suggests that the interest rate directly affects the cost of living, and that its effect is asymmetric. Applying the index to the US data for the past 20 years suggests that this effect on the aggregate price index is quantitatively nonnegligible.