Generalized Logarithmic Index Numbers with Demand Shocks: Bridging the Gap between Theory and Practice

Naohito Abe, 修人 阿部 and D.S. Prasada Rao ()

No DP20-1, RCESR Discussion Paper Series from Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University

Abstract: There has long been a gap between theory and practice for measuring aggregate price changes. As Samuelson and Swamy (1974, AER) stated, deflators must satisfy transitivity to make real consumption expenditures consistent with consumer theory. To date, few well-known indices are transitive. Building on Redding and Wenstein (2020), we consider a generalized logarithmic index with demand shocks and establish its monotonicity and transitivity properties, which fills the gap. We also derive conditions under which the logarithmic price index is unique. Analysis of Japanese weekly scanner data shows that the traditional chained Sato-Vartia index has 4.86 percent downward bias per annum.

Keywords: Price comparisons; Preference Heterogeneity; Logarithmic Indices; Transitivity; Scanner Data; Chain Drift (search for similar items in EconPapers)
JEL-codes: C43 E31 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2020-06
Note: 28 June, 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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