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The Stochastic Approach to Index Numbers: Needless and Useless

von der Lippe, Peter (2014): The Stochastic Approach to Index Numbers: Needless and Useless.

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Abstract

The New Stochastic Approach (NSA) – unjustly – pretends to promote a better understanding of price index (PI) formulas by viewing them as regression coefficients. As prices in the NSA are assumed to be collected in a random sample (what is particularly at odds with official price statistics), PIs are random variables so that not only a point estimate but also an interval estimate of a PI can be provided. However this often praised "main advantage" of the NSA is hardly of any use from a practical point of view. In the NSA goodness of fit is confused with adequacy of a PI formula. Regression models are mostly farfetched, stipulate restrictive and unrealistic assumptions, replicate only already known PI formulas and they say nothing about axioms satisfied or violated by a PI.

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