Hamilton (2001) proposed a method for estimating changes in the cost of living and bias in Price Indices (such as the CPI). The method is simple and intuitively appealing and has been widely adopted. We show that the standard interpretation of the Hamilton method is incoherent. A coherent interpretation is that the Hamilton method and the CPI each measure the change in the cost-of-living at a different point in the income distribution. Thus the Hamilton approach conflates CPI bias with variation in inflation across income levels. We show conditions under which these two components can be disentangled. Applying this refinement to Hamilton’s data leads to findings that are quantitatively different from the original paper.
Presented by:
Tom Crossley (Dept. of Economics)
Date & time:
December 2, 2015 1:00 pm - December 2, 2015 2:00 pm
Venue:
2N2.4.16
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