This paper estimates a cost-of-living index using a dynamic structural model for two storable product categories. In each category, regime shifts to higher or lower retail prices are observed. Fixed-base indexes do a poor job of capturing changes in welfare after a regime shift, and deviate from the dynamic index by as much as 300 percent. I evaluate the extent to which two recently proposed indexes can approximate the model-derived index. These indexes improve welfare measurement and are straightforward to compute. The category's competitive structure and features of the regime shift determine which of the two provides a better approximation.
"Approximating the Cost-of-Living Index for a Storable Good."
American Economic Journal: Microeconomics,
Index Numbers and Aggregation; Leading indicators
Model Construction and Estimation
Price Level; Inflation; Deflation
Production, Pricing, and Market Structure; Size Distribution of Firms