Does the CPI Mirror Costs-of-Living? Engel's Law Suggests Not in Norway
AbstractThere is considerable interest in identifying the magnitude of the difference between increases in CPI and costs-of-living, and this article uses the technique proposed by Hamilton (2001) to measure this discrepancy for Norway for the 90s. The method is extended along several dimensions by introducing a framework in which measurement errors are modelled. A non-parametric approach is then employed to segment households into demographic types while allowing for flexibility in costs-of-living increases for different standards. Hamilton finds that American CPI overstates costs-of-living in the U.S. for the period 1974-1991, Norwegian results for 1990-1999 indicate that CPI sometimes may understate costs-of-living, perhaps because of a credit-financed boom in house prices. The Norwegian CPI rose 22 percent in the period, but the general consumer behaved as if costs-of-living increased more than 35 percent. For some segments of society, for example single-person households, the increase was substantially larger, suggesting potentially important distributional effects.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 368.
Date of creation: Feb 2004
Date of revision:
Almost-Ideal-Demand-System; consumer price index bias; cost-of-living; demand for food; Engel's Law; household behavior; house prices; inflation; real income; standards of living;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-14 (All new papers)
- NEP-MAC-2004-03-14 (Macroeconomics)
- NEP-MON-2004-03-14 (Monetary Economics)
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- Timothy K.M. Beatty & Erling Røed Larsen & Dag Einar Sommervoll, 2005. "Measuring the Price of Housing Consumption for Owners in the CPI," Discussion Papers 427, Research Department of Statistics Norway.
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