Retrospective Price Indices and Substitution Bias

Walter Erwin Diewert (), Marco Huwiler and Ulrich Kohli

UBC Departmental Archives from UBC Department of Economics

Abstract: The consumer price index (CPI) is usually computed as a fixed-weighted Laspeyres price index, with the weights updated at discrete intervals only. It is well known that the Laspeyres functional form entails a substitution bias. One way to reduce it would be to use chained indices, and superlative ones if possible. Unfortunately, the necessary data are often missing. This paper proposes a simple method to retroactively compute the CPI once updated weights become available. The proposed index has the Fisher form. This makes it possible to assess the size of the substitution bias. An application to Swiss data is provided.

Keywords: price index; inflation; superlative indices; substitution bias (search for similar items in EconPapers)
JEL-codes: C43 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2009-01-20, Revised 2009-01-20

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Related works:
Journal Article: Retrospective Price Indices and Substitution Bias (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:ubc:bricol:erwin_diewert-2009-4

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