The true index of cost of living under general equilibrium: The numéraire matters

The evaluation of welfare effects should be unambiguous. We show that the Konüs true index of cost of living is numéraire dependent in general equilibrium. This may lead to ambiguous, even contradictory, interpretations of welfare results. To correct this problematic interpretational situation, we p...

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Bibliographic Details
Published in:Economics letters 2018-12, Vol.173, p.69-72
Main Authors: Guerra, Ana-Isabel, Manresa, Antonio, Sancho, Ferran
Format: Article
Language:English
Subjects:
Ambiguity
Cost of living
Equilibrium
General equilibrium
Impact analysis
Konüs index
Normalization
Numerical analysis
Studies
True cost of living
Welfare effects
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Summary:The evaluation of welfare effects should be unambiguous. We show that the Konüs true index of cost of living is numéraire dependent in general equilibrium. This may lead to ambiguous, even contradictory, interpretations of welfare results. To correct this problematic interpretational situation, we propose a normalization of the standard Konüs index using an endogenously determined price index. We also provide a simplified expression of the index for the special case of homothetic utilities, which is especially relevant given their widespread use in numerical general equilibrium. •Under general equilibrium, the choice of numéraire implies a measurement bias in the Konüs index.•We propose a simple solution that solves the ambiguities generated by the choice of numéraire.•We show the connection of the Konüs index with the two classical money metric welfare indicators.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2018.09.016