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Does the CPI Mirror Costs-of-Living? Engel's Law Suggests Not in Norway

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  • Erling Røed Larsen

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    (Statistics Norway)

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    Abstract

    There 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 Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 368.

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    Date of creation: Feb 2004
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    Handle: RePEc:ssb:dispap:368

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    Keywords: 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;

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    Cited by:
    1. 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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