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Does CPI Approximate Cost-of-Living?: Evidence from the Czech Republic

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  • Jiri Podpiera

Abstract

An original method based on an n-markets simultaneous partial equilibrium model is designed to evaluate the second order bias in the Consumer Price Index's (CPI) approximation of the Cost-of-Living (COL) and to test the statistical significance of its mean value over a variety of horizons. In the empirical application of the model I consider nine goods markets that correspond to the first strata level breakdown of the CPI in the Czech Republic for the period 1994-2000. Having evaluated the substitution bias, i.e., the difference between the growth rate of the CPI and the growth rate of the COL, I find that on a yearly basis it ranges from -0.83 to 0.51 p.p. In addition, I find that, on average, the bias statistically vanishes on the time horizon of five quarters. Different levels of inflation such as moderate (10%) and lower (2%) characterized the sample period and therefore I conclude that the derived result is robust up to moderate inflation.

Suggested Citation

  • Jiri Podpiera, 2003. "Does CPI Approximate Cost-of-Living?: Evidence from the Czech Republic," CERGE-EI Working Papers wp214, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp214
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    File URL: http://www.cerge-ei.cz/pdf/wp/Wp214.pdf
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    Cited by:

    1. Réka Juhász, 2008. "The optimal rate of inflation and the inflation target: international experience and the Hungarian perspective," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 3(2), pages 30-37, September.

    More about this item

    Keywords

    second order bias; partial equilibrium; CPI bias;
    All these keywords.

    JEL classification:

    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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