The Path-Dependence Bias in Approximating Local Price Levels by CPIs

Gluschenko, Konstantin (2016): The Path-Dependence Bias in Approximating Local Price Levels by CPIs.

Abstract

Lacking data on price levels across locations, economists are forced to proxy them. One method is to extrapolate the price levels known for locations in some point in time to another point by multiplying the initial price levels by the local CPIs. With the use of simulation experiments, this paper demonstrates that such a method is inadequate, since the path dependence of CPI alone produces considerable biases distorting cross-location comparisons of price levels.

• Item Type: MPRA Paper
• Language: English
• Keywords: spatial price index; inflation; Divisia index; nonhomothetic preferences; demand system
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General; C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R19 - Other

References

Chen, L.-L., Devereux J., 2003. What can US city price data tell us about purchasing power parity? Journal of International Money and Finance 22 (2), 213–222.

Eurostat, OECD, 2012. Eurostat-OECD Methodological Manual on Purchasing Power Parities. Luxembourg: Publications Office of the European Union.

Faber R. P., Stockman A. C. J., 2009. A short history of price level convergence in Europe. Journal of Money, Credit and Banking 41 (2-3), 461–477.

Gluschenko, K., 2006. Biases in cross-space comparisons through cross-time price indexes: the case of Russia. BOFIT Discussion Paper No. 9.

Hulten, C. R., 2008. Divisia index. In: Durlauf S.N., Blume, L.E. (Eds.), The New Palgrave Dictionary of Economics. 2nd ed. Palgrave Macmillan.

ILO, IMF, OECD, UNECE, Eurostat, World Bank, 2004. Consumer Price Index manual: Theory and practice. Geneva: International Labour Office.

Rogoff, K., 1996. The purchasing power parity puzzle. Journal of Economic Literature 34 (2), 647-668.

Samuelson P.A., Swamy S., 1974. Invariant economic index numbers and canonical duality: survey and synthesis. American Economic Review 64 (4), 566-593.

Solanko, L., 2008. Unequal fortunes: a note on income convergence across Russian regions. Post-Communist Economies 20 (3), 287–301.