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What Weight Should be Given to Asset Prices in the Measurementof Inflation?

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  • C. Goodhart
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    Abstract

    Besides the theoretical (Alchian/Klein, 1973) case for including asset prices in measures of inflation, there is also a practical case, that some asset prices, notably housing, are closely associated with the main trends in inflation, and via 'bubbles and busts' with output disturbances. Attempts to use the pure Alchian/Klein methodology in practice give excessive weight to unstable asset prices, but there are more appropriate weighting schemes, derived either from econometrically measured relationships or from final expenditures. Either way, the statistical treatment of housing is crucial, and is being discussed in Eurostat.

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    File URL: http://www.dnb.nl/binaries/sr065_tcm46-146842.pdf
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    Bibliographic Info

    Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 65.

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    Length: 37 pages
    Date of creation: 2001
    Date of revision:
    Handle: RePEc:dnb:staffs:65

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    Web page: http://www.dnb.nl/en/
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    Related research

    Keywords: Inflation; Asset Prices; Housing; Price Indices; Inflation Targets;

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    References

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    1. Alchian, Armen A & Klein, Benjamin, 1973. "On a Correct Measure of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 5(1), pages 173-91, Part I Fe.
    2. Stephen G. Cecchetti & Anil K Kashyap, 1995. "International Cycles," NBER Working Papers 5310, National Bureau of Economic Research, Inc.
    3. Axel Leijonhufvud, 1981. "Inflation and Economic Performance," UCLA Economics Working Papers, UCLA Department of Economics 223, UCLA Department of Economics.
    4. Alan S. Blinder, 1980. "The Consumer Price Index and the Measurement of Recent Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(2), pages 539-573.
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