We establish five facts about prices in the U.S. economy: 1) The median implied duration of consumer prices when sales are excluded at the product level is between 8 and 11 months. The median implied duration of finished goods producer prices is 8.7 months. 2) One-third of regular price changes are price decreases. 3) The frequency of price increases responds strongly to inflation while the frequency of price decreases and the size of price increases and price decreases do not. 4) The frequency of price change is highly seasonal: It is highest in the 1st quarter and lowest in the 4th quarter. 5) The hazard function of price changes for individual consumer and producer goods is downward sloping for the first few months and then flat (except for a large spike at 12 months in consumer services and all producer prices). These facts are based on CPI microdata and a new comprehensive data set of microdata on producer prices that we construct from raw production files underlying the PPI. We show that the 1st, 2nd and 3rd facts are consistent with a benchmark menu-cost model, while the 4th and 5th facts are not.

The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada. This paper was prepared at Stanford University and was not edited by the Bank of Canada. iii

This paper argues that the primary force behind the large fall in real exchange rates that occurs after large devaluations is the slow adjustment in the price of nontradable goods and services. Our empirical analysis is based on data from four large devaluation episodes: Mexico (1994), Korea (1997), Brazil (1999), and Argentina (2001). We conduct a more detailed analysis of the Argentina case using disaggregated CPI data, data from our own survey of prices in Buenos Aires, and scanner data from supermarkets. We then construct an open economy general equilibrium model that can account for the slow adjustment in nontradable good prices after a large devaluation. J.E.L. Classification: F31 ∗We thank Miles Kimball for his suggestions, Kei-Mu Yi for sharing data and information on input-output tables with us, and Federico Ganduglia and Martin Cortes for assistance in collecting prices in Argentina. We also thank Andy Levin, Mario Crucini, Ivan Werning, and Mike Woodford for their comments. We gratefully acknowledge financial support from the

he recent report of the Advisory Commission appointed by the U.S. Senate Finance Committee begins with one overarching recommendation: "The BLS should establish a cost-of-living index (COLI) as its objective in measuring consumer prices " (U.S. Senate, 1996, p. 2). This seems basically right to us. Indeed, the BLS has long said that the cost-of-living framework guides operational decisions about the construction of the index (Gillingham, 1974; U.S. Bureau of Labor Statistics, 1984, 1988, 1992, 1997a). Putting things slightly differently, if the BLS staff or other technical experts knew how to produce a true cost-of-living index on a monthly production schedule, that would be what we would produce. Although we have no fundamental disagreement with the Commission about what the objective of the CPI program ought to be, we may disagree to some extent about the approaches and methods that are appropriate and feasible in working toward that objective. This is a point to which we will return below. Our first purpose in the present paper is to comment on the Advisory Commission's report and the recommendations it contains. ' We then will describe some of the initiatives currently underway at the BLS-some of which were undertaken ' U.S. Bureau of Labor Statistics (1997b) provides a more comprehensive review of the report and its recommendations. This and other documents pertaining to the Consumer Price Index (CPI) are available on the Bureau's Web site at

We introduce an instrumental variables approach to estimating unmeasured quality growth for a set of 66 durable consumer goods. Our instrument is based on predicting which goods will display relatively rapid quality growth. Using pooled cross sections of households in the 1980 through 1996 U.S. Consumer Expenditure Surveys, we estimate "quality Engel curves " for 66 durable consumer goods based on the extent richer households pay more for a good, conditional on purchasing. We use the slopes of these curves to predict the rate of qualityupgrading. Just as if households are ascending these quality Engel curves over time, we find that the average price paid rises faster for goods with steeper quality slopes. BLS prices likewise increase more quickly for goods with steeper quality slopes, suggesting the BLS does not fully net out the impact of quality upgrading on prices paid. We estimate that quality growth averages about 3.7 % per year for our goods, with about 60 % of this, or 2.2 % per year, showing up as higher inflation rather than higher real growth. For helpful comments we are grateful to Per Krusell, William Nordhaus, an anonymous

Much of CPI inflation for durable goods reflects, not price increases for a given set of products, but shifts to newer product models that display higher prices. I examine how these price differences should be divided between quality growth and price inflation based on how consumer spending responds to product substitutions. For all goods examined (cars, other vehicles, televisions, and other consumer electronics) buying shifts to the newer models despite their higher prices. The results suggest that quality growth for durables over the past 17 years has averaged about five percent per year, double the rate based on the CPI. This work was conducted while I was visiting the Bureau of Labor Statistics (BLS) under the Intergovernmental Personnel Act (IPA) agreement. A number of persons at the BLS have been extremely helpful. I particularly thank David Johnson, Teague Ruder, Paul Liegey, Michael Hoke, and Walter Lane. Any interpretations presented are my own, and should not be associated with the BLS. I also thank Gordon Dahl and Pete Klenow for their comments; this paper initiated from discussions with Pete Klenow. The research is supported by a grant from the National Science Foundation. Much of economic growth occurs through growth in quality as new models of consumer goods

Much of CPI inflation for consumer durables reflects shifts to newer product models that display higher prices, not price increases for a given set of goods. I examine how these higher prices for new models should be divided between quality growth and price inflation based on: (a) whether consumer purchases shift toward or away from the new models, and (b) whether new-model price increases generate higher relative prices that persist through the model cycle. I conclude that two-thirds of the price increases with new models should be treated as quality growth. This implies that CPI inflation for durables has been overstated by almost 2 percentage points per year, with quality growth understated by the same magnitude. This work was conducted while I was visiting the Bureau of Labor Statistics (BLS) under the Intergovernmental Personnel Act (IPA) agreement. A number of persons at the BLS have been extremely helpful. I particularly thank David Johnson, Robert McClelland, Teague Ruder, Paul Liegey, Michael Hoke, and Walter Lane. Any interpretations presented are my own, and should not be associated

. We define the plutocratic bias as the di#erence between the inflation measured according to the current o#cial CPI and a democratic index in which all households receive the same weight. (i) We estimate that during the 1990s the plutocratic bias in Spain amounts to 0.055 per cent per year, or about one third of the classical substitution bias estimated by the Boskin Commission for the U.S. (ii) We find that a 16-dimensional commodity space can be conveniently reduced to 3 dimensions, consisting of a luxury good and two necessities. The price behavior of these 3 goods provides a convincing explanation of the oscillations experimented by the plutocratic bias. (iii) Finally, the fact that the plutocratic bias is positive during this period, implies that the change in money income inequality is between 2 and 5 per cent greater than the change in real income inequality. We study the robustness of these results to the time period considered and to the definition of the group index which se...

. In this paper we address the issue of the distributional consequences of the quality change bias (QCB) in the CPI. In particular, we assess the conjecture raised by some critics of the Boskin commission report that new products and goods a#ected by quality e#ects are disproportionately consumed by the rich. Our analysis begins with the observation that the CPI is a weighted mean of household-specific statistical price indexes, with weights proportional to household total expenditures. Then, we suggest a simple but powerful procedure to evaluate the distributional consequences of eliminating the QCB by examining its impact on two scalars: (1) the CPI plutocratic bias, and (2) the change in money inequality after compensating every household for her individual inflation rate. The empirical analysis combines the detailed information pertaining the size of the QCB for the U.S. with household-specific price indexes for Spain in 1973--74, 1980--81, and 1990--91. The results sh...

Real income is an imperfect measure of trends in living standards. Current income numbers are deflated using a consumer price index and the many sources of bias in the consumer price index have been emphasized by the Boskin Commission (Boskin et al. 1998). Real income does not account for such goods as health that are not purchased in the marketplace, for quality changes, for revolutionary technological change, and for increases in leisure. Trends in health suggest that we may be overestimating income increases in the nineteenth century and underestimating income increases in the twentieth (Costa and Steckel 1997). Cutler et al. (1998) find that between 1983 and 1994 the price of heart attack treatments fell by 1.1 percent per year, once adjustments are made for quality, whereas a conventional price index suggests that prices were increasing. Nordhaus (1997) finds that between 1800 and 1992 the bias in a conventional price index of lighting is 3.6 percent per year. Trends in work hours imply that we are underestimating improvements in living standards during the twentieth century.