Lost in Translation: What Do Engel Curves Tell Us About the Cost of Living?

57 Pages Posted: 9 Apr 2018

See all articles by Ingvild Almås

Ingvild Almås

Stockholm University - Institute for International Economic Studies (IIES)

Timothy K. M. Beatty

University of British Columbia (UBC) - Faculty of Agricultural Sciences

Thomas F. Crossley

European University Institute - Economics Department (ECO); Institute for Fiscal Studies

Date Written: February 15, 2018

Abstract

The Hamilton method for estimating CPI bias is simple, intuitive, and has been widely adopted. We show that the method confiates CPI bias with variation in cost-of-living across income levels. Assuming a single price index across the income distribution is inconsistent with the downward sloping Engel curves that are necessary to implement the method. We develop and implement the Translated Engel curve (TEC) method that disentangles genuine CPI bias from differences caused by comparing changes in the cost of living across different income levels - non-homotheticity. The TEC method gives substantially different estimates of CPI bias prior to major reforms to the CPI in 1999 (post-Boskin), but both methods suggest very little CPI bias thereafter.

Keywords: Engel curves, current price index, cost of living

JEL Classification: C430, C820, D120, D310, E310

Suggested Citation

Almås, Ingvild and Beatty, Timothy K. M. and Crossley, Thomas F., Lost in Translation: What Do Engel Curves Tell Us About the Cost of Living? (February 15, 2018). CESifo Working Paper Series No. 6886, Available at SSRN: https://ssrn.com/abstract=3156848

Ingvild Almås

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

Timothy K. M. Beatty

University of British Columbia (UBC) - Faculty of Agricultural Sciences ( email )

Vancouver, BC V6T 1Z4
Canada
604-822-1203 (Phone)
604-822-2184 (Fax)

Thomas F. Crossley (Contact Author)

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Institute for Fiscal Studies ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

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