Consumers' Opinion of Inflation Bias Due to Quality Improvements in Transition in the Czech Republic

Abstract:     
Substantial understatement of the degree of quality improvement during transition, and, therefore, a substantial overstatement of inflation rates has resulted in a serious downward bias in estimates of the rate of growth of post-communist economies. The move to free markets has apparently improved consumers' welfare more by improving what they can purchase than by increasing how much they can purchase. Examining 63 products, focus group respondents in the Czech Republic reported that if they were to purchase the 1990 quality product today they would only be willing to do so at an average of 54 per cent of the current price for the current quality product. This implies that the actual increase in prices for the decade for these products was 66 per cent instead of the official 139 per cent. Overall, mismeasurement of quality changes may have understated Czech growth rates during the first decade after communism by as much as 5 percentage points per year.

Number of Pages in PDF File: 25

Keywords: Inflation Bias, Quality Change, Transition Economies

JEL Classification: C82, E31, P24

working papers series