The substitution bias of the consumer price index

Petter Frenger ()
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Petter Frenger: Statistics Norway, https://www.ssb.no/en/forskning/ansatte

Discussion Papers from Statistics Norway, Research Department

Abstract: The paper uses elementary consumer theory to propose an inflation independent ratio definition of the substitution bias of the Laspeyres consumer price index, and derives an approximate substitution bias which depends on the size of the price change as measured by a norm in the Laspeyres plane and on the elasticity of substitution in the direction of the price change. This norm or distance measure can be interpreted as a price substitution index which yields useful information about the movements of relative prices. Norwegian CPI data are used to quantify these relationships.

Keywords: consumer price index (CPI); substitution bias; elasticity of substitution. (search for similar items in EconPapers)
JEL-codes: C43 D12 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-cba
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