Asian Review of Financial Research Vol.20 No.1 pp.125-141
Measuring the User Cost of Owner-Occupied Housing for the True Cost of Living Index
Key Words : User Cost of Owner-Occupied Housing,Superlative Index Numbers,True Cost of Living Index,Divisia Price Index,Consumer Price Index
Using a single intertemporal consumption allocation model, we derive the user cost of owner-occupied housing and show a unified, internally consistent approach to incorporate the user cost in the Diewert-superlative index numbers such as the Divisia price index, which may be called as the True Cost of Living Index (TCLI). Since the user cost contains the expected rate of capital gains, we formulate an adaptive- extrapolative expectation model to estimate and forecast the expected series quarter by quarter. In an application to Korea, our user-cost evaluated index numbers exhibit wider inflation rate fluctuations than the Consumer Price Index (CPI), reflecting monetary policy implemented under the auspices of the International Monetary Fund and the World Bank during the 1997 foreign exchange crisis. Therefore, for a country like Korea where house prices are subject to great inflation, it is more critical to make a concerted effort to compile the necessary data and to construct the TCLI, such as the Divisia price index, with our user cost concept rather than to simply rely on the fixed-weight CPI including an ad hoc measure of owner-occupied housing without theory.