Constant utility index and inter-month substitution

Patrick Sillard and Lionel Wilner

Economics Bulletin, 2015, vol. 35, issue 3, 1772-1781

Abstract: This note aims at measuring the cost-of-living thanks to a constant utility index derived from monthly nested CES preferences that account for substitution across months. We estimate empirically that the bias due to substitution across months lies between .07 and .33 pp per year in the clothing industry. A simulation evaluates the global inter-month substitution bias between .02 and .1 pp per year, which amounts to an important part of the global substitution bias comprised between .05 and .4 pp. To approximate the cost-of-living, implementation guidelines for statistical agencies include (i) weighting monthly price indexes with monthly budget shares, and (ii) computing a weighted Fisher or another superlative index instead of a Laspeyres index.

Keywords: Consumer price index; cost-of-living; intertemporal substitution; nested CES utility (search for similar items in EconPapers)
JEL-codes: D0 (search for similar items in EconPapers)
Date: 2015-08-21
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