Munich Personal RePEc Archive

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.

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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.

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