Abstract
This paper compares conditional and unconditional cost-of-living indexes (COLI) when tastes change, focusing on the Constant Elasticity of Substitution model. A consumer price index typically targets a conditional COLI, which evaluates price change given set of preferences. An unconditional COLI aims to also capture the welfare effects of changing tastes, but it requires stronger assumptions. Using retail scanner data for food and beverage products, I find COLIs conditioning on current period tastes exceed those conditioning on prior period tastes. Consistent with previous studies, I find an unconditional COLI tends to reflect negative direct contributions from taste change.
Reference43 articles.
1. National Research Council. At What Price: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Schultze C and Mackie C. National Academies Press, 2002.
2. The economic theory of index numbers and the measurement of input, output, and productivity;Caves;Econometrica: Journal of the Econometric Society.,1982
3. Measuring aggregate price indices with taste shocks: Theory and evidence for CES Preferences;Redding;The Quarterly Journal of Economics.,2020
4. Improving initial estimates of the Chained Consumer Price Index
5. Substitution effects and biases in nontrue price indices;Lloyd;The American Economic Review.,1975