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Constructing the true cost of living index from the Engel curves of the PIGLOG model
Author(s) -
Fry Vanessa,
Pashardes Panos
Publication year - 1989
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950040104
Subject(s) - engel curve , index (typography) , commodity , econometrics , inflation (cosmology) , economics , substitution (logic) , construct (python library) , cost of living , price index , simple (philosophy) , degree (music) , statistics , mathematics , computer science , macroeconomics , finance , philosophy , physics , epistemology , theoretical physics , acoustics , programming language , world wide web
This paper investigates the properties of the Tornqvist index and shows how this can be used to construct a true cost of living index from a simple system of Engel curves. This allows the substitution bias inherent in a fixed weight index to be estimated using the maximum degree of commodity disaggregation available in the data. Furthermore the proposed index can be decomposed to show the impact of inflation on households with different expenditure levels and household chararacteristics. An empirical application of the method is given, using data on UK food expenditures.