Cost-of-Living Index of an Estimated Generalized CES Utility Function that Implicitly Accounts for Changes in Preferences for and Qualities of Goods

Thomas M. Menino Convention & Exhibition Center 

The paper develops and applies a new method for computing a cost of living index (COLI) based on an estimated generalized constant-elasticity-of-substitution utility function (GCESUF) that has 4 main desirable features: (i) GCES/COLI is developed formally using economic reasoning, mathematics, and econometrics; (ii) GCESUF maps one-to-one to a translog utility function (TLUF) and, therefore, accounts similarly for consumer responses to changed prices and expenditures as a TLUF while generally being nonhomothetic; (iii) GCES/COLI accounts implicitly for changes in preferences for goods for any reasons, including changes in qualities of goods, so that hedonic adjustment of prices of goods for changes in qualities of goods is unnecessary and unwarranted; (iv) GCES/COLI is practically applicable to many goods, like the thousands of goods in the U.S. Consumer Price Index of Urban Consumers (CPIU).

continuous-time modelling of discrete-time data

converting continuous-time differentials to discrete-time differences