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Do Higher Prices for New Goods Reflect Quality Growth or Inflation?

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Author Info

  • Mark Bils

    (University of Rochester and NBER.)

Abstract

Much of Consumer Price Index (CPI) inflation for consumer durables reflects shifts to newer product models that display higher prices, not price increases for a given set of goods. I examine how these higher prices for new models should be divided between quality growth and price inflation based on (a) whether consumer purchases shift toward or away from the new models and (b) whether new-model price increases generate higher relative prices that persist through the model cycle. I conclude that two-thirds of the price increases with new models should be treated as quality growth. This implies that CPI inflation for durables has been overstated by almost 2 percentage points per year, with quality growth understated by the same magnitude. (c) 2009 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 124 (2009)
Issue (Month): 2 (May)
Pages: 637-675

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Handle: RePEc:tpr:qjecon:v:124:y:2009:i:2:p:637-675

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Cited by:
  1. Etienne Gagnon & Benjamin R. Mandel & Robert J. Vigfusson, 2014. "Missing Import Price Changes and Low Exchange Rate Pass-Through," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 156-206, April.
  2. Ana Aizcorbe & Benjamin Bridgman & Jeremy Nalewaik, 2009. "Heterogeneous car buyers: a stylized fact," Finance and Economics Discussion Series 2009-12, Board of Governors of the Federal Reserve System (U.S.).
  3. Alcalá Francisco, 2009. "Time, Quality and Growth," Working Papers 201052, Fundacion BBVA / BBVA Foundation.
  4. Joseph Vavra, 2013. "Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 215-258.
  5. Joseph Vavra, 2011. "Inflation Dynamics and Time-Varying Uncertainty: New Evidence and an Ss Interpretation," 2011 Meeting Papers 126, Society for Economic Dynamics.
  6. Oleksiy Kryvtsov, 2013. "Is There a Quality Bias in the Canadian CPI? Evidence from Micro Data," Working Papers 13-24, Bank of Canada.

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