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Owner-Occupied Housing Costs and Bias in the Irish Consumer Price Index

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  • Colm McCarthy

    (University College of Dublin)

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    Abstract

    The treatment of owner-occupied housing costs is a recurring problem in the construction of consumer price indices, and there are competing methodologies. In the most widely-used Irish index, the Payments Approach, which attaches a weight to a term involving historical house prices and an interest rate, is used to measure these costs. It is argued that this has resulted in a substantial over-statement of inflation in recent quarters, and that the over-statement will continue for some time. The Irish version of Eurostat’s Harmonised Index of Consumer Prices, recently running well below the CPI, is a more reliable guide. Few national statistical offices use the Payments Approach, and it is argued that the procedure used in Ireland should be reviewed.

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    File URL: http://www.ucd.ie/economics/research/papers/2007/WP07.07.pdf
    File Function: First version, 2007
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    Bibliographic Info

    Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200707.

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    Length: 19 pages
    Date of creation: 20 Jun 2007
    Date of revision:
    Handle: RePEc:ucn:wpaper:200707

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    Keywords: Consumer Price Index; Cost of Living Index; Payments Approach; Owner-Occupied Housing;

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    References

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    1. Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, vol. 111(472), pages F335-56, June.
    2. Philip R. Lane, & Patrick Honohan, 2003. "Divergent Inflation Rates in EMU," The Institute for International Integration Studies Discussion Paper Series iiisdp05, IIIS.
    3. Ian Crawford & Isabella Image, 2004. "The Retail Price Index and the Cost-of-Living Index: testing for consistency in theory and practice," Fiscal Studies, Institute for Fiscal Studies, vol. 25(1), pages 79-91, March.
    4. C. Goodhart, 2001. "What Weight Should be Given to Asset Prices in the Measurementof Inflation?," DNB Staff Reports (discontinued) 65, Netherlands Central Bank.
    5. R. A. Somerville, 2004. "Changes in Relative Consumer Prices and the Substitution Bias of the Laspeyres Price Index - Ireland, 1985-2001," The Economic and Social Review, Economic and Social Studies, vol. 35(1), pages 55-82.
    6. Raquel Arévalo & Javier Ruiz-Castillo, 2004. "The Rental Equivalence Approach To Nonrental Housing In The Consumer Price Index. Evidence From Spain," Economics Working Papers we041704, Universidad Carlos III, Departamento de Economía.
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    Cited by:
    1. Mark A. Wynne, 2008. "How should central banks define price stability?," Globalization and Monetary Policy Institute Working Paper 08, Federal Reserve Bank of Dallas.

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