Courtney, Mark (2013): Consumer price indices and the identification problem. Published in: Statistical Journal of the IAOS , Vol. 29, No. 1 (2013): pp. 41-51.
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Abstract
Conventionally, consumer price indices are constructed on the assumption that we are observing a stable system of consumer demand, and that all price movements are, therefore, the result of supply-side changes. This often leads to an emphasis on consumer price substitution and to a recommendation that we should allow for it by using the geometric mean for first-stage aggregation. This paper argues, on the basis of economic theory and from observations on the UK clothing sub-index, that demand-side changes are also important in generating price movements. For most items we are unable to solve the resulting identification problem of whether supply-side or demand-side influences predominate: in these circumstances, the appropriate formula to use for first-stage aggregation is one that makes no assumptions about the cause of price changes – i.e. one that uses an arithmetic rather than a geometric average. Allowing for both sources of price movements also affects the way in which elementary aggregates should be defined: this should be on the basis of both demand and supply characteristics, in order to minimise problems that arise when aggregating disparate products.
Item Type: | MPRA Paper |
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Original Title: | Consumer price indices and the identification problem |
Language: | English |
Keywords: | Consumer price indices, first-stage aggregation, identification problem, demand-side changes, geometric mean, elasticity of substitution |
Subjects: | E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation |
Item ID: | 54137 |
Depositing User: | Dr Mark Courtney |
Date Deposited: | 06 Mar 2014 14:44 |
Last Modified: | 27 Sep 2019 14:06 |
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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/54137 |