Measuring changes in the value of the numeraire

Ricardo Reis and Mark Watson

No 1364, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This paper estimates a common component in many price series that has an equiproportional effect on all prices. Changes in this component can be interpreted as changes in the value of the numeraire since, by definition, they leave all relative prices unchanged. The first aim of the paper is to measure these changes. The paper provides a framework for identifying this component, suggests an estimator for the component based on a dynamic factor model, and assesses its performance relative to alternative estimators. Using 187 U.S. time-series on prices, we estimate changes in the value of the numeraire from 1960 to 2006, and further decompose these changes into a part that is related to relative price movements and a residual 'exogenous' part. The second aim of the paper is to use these estimates to investigate two economic questions. First, we show that the size of exogenous changes in the value of the numeraire helps distinguish between different theories of pricing, and that the U.S. evidence argues against several strict theories of nominal rigidities. Second, we find that changes in the value of the numeraire are significantly related to changes in real quantities, and discuss interpretations of this apparent non-neutrality.

Keywords: Inflation; Money illusion; Monetary neutrality; Price index (search for similar items in EconPapers)
JEL-codes: C32 C43 E31 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/17876/1/kap1364.pdf (application/pdf)

Related works:
Working Paper: Measuring Changes in the Value of the Numeraire (2007)
Working Paper: Measuring changes in the value of the numeraire (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1364

Access Statistics for this paper

More papers in Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().