D'Elia, Enrico (2008): Hedonic Regressions, Matched Models and Economic Theory.
Download (316Kb) | Preview
Quality adjustment of price indexes affects the analysis of many sensitive economic issues, such as real growth, productivity, international competitiveness, real wages, per-capita consumption and poverty, other than inflation. Hedonic methods are often recommended and increasingly used in the compilation of consumer price indexes. Nevertheless many official statistical agencies continue adopting traditional methods considering only the dynamics of prices of products matching in two adjacent periods of time. Indeed, a number of studies have even recently remarked that hedonic methods sometimes provide results very similar to the traditional matching models approach, particularly when models included in price index sample are replenished frequently. This paper briefly surveys the economic theory behind hedonic and traditional quality adjustment methods, and demonstrates that average price changes estimated by hedonic regressions differ from matched models estimation only because of the sum of regression residuals associated to disappearing and new models included in the sample. Thus, hedonic regressions including among the explanatory variables some indicators of the novelty and oldness of models provide exactly the same results of traditional methods. This fact casts some doubt on the overall effectiveness of hedonic methods in quality adjustment. The paper also focuses on that some economic and statistical hypotheses underlying hedonic methods possibly conflict with the assumptions and practices embodied in compiling the harmonised index of consumer prices for European countries.
|Item Type:||MPRA Paper|
|Original Title:||Hedonic Regressions, Matched Models and Economic Theory|
|Keywords:||Consumer price index; Harmonised Index of Consumer Prices (HICP); Hedonic regressions; Matched models; Measurement of inflation; Quality adjustment|
|Subjects:||C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation
C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology; Computer Programs > C82 - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
|Depositing User:||Enrico D'Elia|
|Date Deposited:||25. Jan 2012 15:58|
|Last Modified:||14. Feb 2013 18:24|
Aizcorbe, A., Corrado C. and Doms M. (2000), “Constructing Price and Quantity Indexes for High Technology Goods”, mimeo, Board of Governors of the Federal Reserve System, Washington. Boskin, M.J., et al. (1996), Final Report of the Advisory Commission to Study the Consumer Price Index. Washington, DC: U.S. Government Printing Office.
D'Elia E. (2000), “Quality Adjustment Following the Revealed Preferences Approach”, paper presented at the HICP Task Force held in Paris.
Diewert W. E. (2001), “Hedonic Regressions: A Consumer Theory Approach”, Department of Economics the University of British Columbia, Vancouver, Discussion Paper n. 01-12.
Eurostat (1993), System of National Accounts, Brussels.
Eurostat (1999), Compendium of HICP Reference Documents: Harmonisation of Price Indices, Eurostat, Luxembourg.
Feenstra R.C. (1995), “Exact Hedonic Price Indices”, Review of Economics and Statistics, vol. 77, pp. 634-654.
Goldberger A. A. (1968), “The Interpretation and Estimation of Cobb-Douglas Functions”, Econometrica, vol. 35, pp. 464-472.
Griliches, Z. (1961), “Hedonic Price Indexes for Automobiles: An Econometric Analysis of Quality Change”, in: Price Statistics Review Committee, National Bureau of Economic Research, The Price Statistics of the Federal Government: Review, Appraisal, and Recommendations, General Series, n. 73, National Bureau of Economic Research, New York, pp. 173-96.
Griliches Z. (1971), “Introduction: Hedonic Price Indexes Revisited”, in Price Indexes and Quality Change, Z. Griliches (ed.), Harvard University Press, Cambridge, pp. 3-15.
Griliches, Z. (ed.) (1971a), Price Indexes and Quality Change: Studies in New Methods of Measurement, Harvard University Press, Cambridge.
Hoven, L. (1999), “Some Observations on Quality Adjustment in the Netherlands”, presented at the Fifth Meeting of the International Working Group on Price Indices, Reykjavik.
Muellbauer J. (1974), “Household Production Theory, Quality, and the ‘Hedonic Technique’”, The American Economic Review, vol. 64, n. 6, pp. 977-994.
Pakes, A. (2003), “A Reconsideration of Hedonic Price Indexes with an Application to PCs”, American Economic Review, vol. 93, pp. 1578-96.
Pollak R. A. and T. J. Wales (1992), Demand System Specification and Estimation, Oxford University Press, Oxford.
Rosen S. (1974), “Hedonic Prices and Implicit Markets: Product Differentiation in PureCompetition”, Journal of Political Economy, vol. 82, n. 1, pp. 34-55.
Schultze C. and Mackie C. (2002), At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes, National Academy Press, Washington.
Silver, M. and Heravi S. (2001), “Scanner Data and the Measurement of Inflation”, Economic Journal, 111(472), pp. 383-404.
Stiglitz, J. E. (1987), "The Causes and Consequences of the Dependence of Quality on Price", Journal of Economic Literature, vol. 25, n. 1, pp 1-48.
Triplett J. (2004), Handbook on Quality Adjustment of Price Indexes for Information and Communication Technology Products, OECD, Paris.