The purpose of this paper is to develop the theory of dynamic equilibrium price index (DEPI), and to discuss its theoretical as well as policy implications. DEPI is derived from intertemporal optimization and arbitrage equilibrium condition as a weighted geometric mean of product price inflation and asset price inflation. DEPI measures a change in ex ante intertemporal cost of living, which is a more fundamental indicator of inflation and the dynamic state of macroeconomy than conventional price indexes. Thus, DEPI functions as an important information variable for monetary policy.
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.