Working Paper: NBER ID: w13041
Authors: Christian Broda; David E. Weinstein
Abstract: This paper describes the extent and cyclicality of product creation and destruction in a large sector of the U.S. economy and quantifies its implications for the measurement of consumer prices. We find four times more entry and exit in product markets than is typically found in labor markets because most product turnover happens within the boundaries of the firm. Net product creation is strongly pro-cyclical, but contrary to the behavior of labor flows, it is primarily driven by creation rather than destruction. High rates of innovation are also accompanied by substantial price volatility of products. These facts suggest that the CPI deviates from a true cost-of-living index in three important dimensions. The quality bias that arises as new goods replace outdated ones causes the CPI to overstate inflation by 0.8 percent per year; the cyclicality of the bias implies that business cycles are more volatile than indicated by official statistics; and finally, sampling error is sufficiently large that over the last 10 years policymakers could not statistically distinguish whether quarterly inflation was accelerating or decelerating 65 percent of the time.
Keywords: Product Creation; Product Destruction; Consumer Price Index; Economic Cycles; Inflation Bias
JEL Codes: E21; E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| net product creation (D85) | economic expansions (E32) |
| sales growth (O49) | net product creation (D85) |
| product destruction (L99) | economic downturns (F44) |
| product turnover (D25) | price volatility (G13) |
| product turnover (D25) | CPI overstatement of inflation (E31) |