The Intertemporal Cost of Living and Dynamic Inflation: The Case of the Czech Republic

Ivan Sutóris

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: When consumers optimize intertemporally, a true cost of living index will depend on changes in both current and future prices as well as rates of return on financial assets. This paper aims to construct a measure of such "dynamic inflation" for the Czech Republic from a solution to the household's intertemporal consumption-saving problem. Dynamic inflation is derived to be a function of current movements in consumption and house prices as well as revisions to forecasts of the future paths of inflation and interest rates. The resulting series constructed from Czech data roughly follows CPI inflation, but is more volatile and less persistent. Housing booms can cause persistent upward deviations, while changes in expected interest rates have a stabilizing effect. In addition, the intertemporal cost of living can also potentially be affected by low-frequency structural shifts in the economy.

Keywords: Cost of living; CPI; dynamic inflation; intertemporal optimization (search for similar items in EconPapers)
JEL-codes: C43 D15 E31 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-mac, nep-mon and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2020/9

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