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Measurement Errors in the Japanese Consumer Price Index

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  • Shiratsuka, Shigenori

    (Institute for Monetary & Econ Studies, Bank of Japan)

Abstract

In Japan, the consumer price index (CPI) is widely used as a measure of inflation or the cost of living. The CPI is constructed by using a fixed-weight Laspeyres formula. This formula is used mainly because of its ease of calculation and comprehension, thus limiting the total cost of constructing the statistics. However, such simplicity makes it difficult for the CPI to reflect dynamic changes in economic activity such as changes in consumers' behavior between goods in response to relative price fluctuation, the introduction of new goods, and the disappearance of old goods. As a result, measurement errors are introduced into the CPI. In this paper, I summarize the problems pertaining to measurement errors inherent in the Japanese CPI, and provide some quantitative assessment. Based on currently available information, I place the point estimate for overall bias in the CPI at about 0.90 percentage point per year. Although this is the best estimate taking into account all information currently available, it is true that the estimate was based on various, rather bold assumptions. In addition, it should be noted that accuracy of the estimate is not necessarily high due to the lack of existing studies in this field in Japan.

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Bibliographic Info

Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 17 (1999)
Issue (Month): 3 (December)
Pages: 69-102

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Handle: RePEc:ime:imemes:v:17:y:1999:i:3:p:69-102

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  1. Angus Deaton, 1998. "Getting Prices Right: What Should Be Done?," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 37-46, Winter.
  2. Mark A. Wynne & Fiona D. Sigalla, 1994. "The consumer price index," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 1-22.
  3. Alan Greenspan, 1995. "Opening remarks," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 1-4.
  4. Robert A. Pollak, 1998. "The Consumer Price Index: A Research Agenda and Three Proposals," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 69-78, Winter.
  5. Marshall Reinsdorf, 1993. "The Effect of Outlet Price Differentials on the U.S. Consumer Price Index," NBER Chapters, in: Price Measurements and Their Uses, pages 227-258 National Bureau of Economic Research, Inc.
  6. Matthew D. Shapiro & David W. Wilcox, 1996. "Mismeasurement in the Consumer Price Index: An Evaluation," NBER Working Papers 5590, National Bureau of Economic Research, Inc.
  7. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  8. Katharine G. Abraham & John S. Greenlees & Brent R. Moulton, 1998. "Working to Improve the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 27-36, Winter.
  9. Diewert, W Erwin, 1978. "Superlative Index Numbers and Consistency in Aggregation," Econometrica, Econometric Society, vol. 46(4), pages 883-900, July.
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  11. Michael J. Boskin, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 3-26, Winter.
  12. Shiratsuka, Shigenori, 1997. "Inflation Measures for Monetary Policy: Measuring the Underlying Inflation Trend and Its Implication for Monetary Policy Implementation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(2), pages 1-26, December.
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Cited by:
  1. Christian Broda & David E. Weinstein, 2007. "Defining Price Stability in Japan: A View from America," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 169-206, December.
  2. Abe, Naohito & Moriguchi, Chiaki & Inakura, Noriko, 2014. "The Impact of the Great East Japan Earthquake on Commodity Prices: New Evidence from High-Frequency Scanner Data," Research Center for Price Dynamics Working Paper Series 12, Research Center for Price Dynamics, Institute of Economic Research, Hitotsubashi University.
  3. Kenn Ariga & Kenji Matsui, 2003. "Mismeasurement of the CPI," NBER Working Papers 9436, National Bureau of Economic Research, Inc.
  4. Kazuhito Higa, 2013. "Estimating Upward Bias in the Japanese CPI Using Engel's Law," Global COE Hi-Stat Discussion Paper Series gd12-295, Institute of Economic Research, Hitotsubashi University.
  5. Etsuro Shioji & Taisuke Uchino, 2011. "Pass-Through of Oil Prices to Japanese Domestic Prices," NBER Chapters, in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 155-189 National Bureau of Economic Research, Inc.
  6. Maki, Atsushi, 2005. "The statistical price index as an approximation of the constant-utility price index: an empirical analysis using Japanese data sets," Journal of the Japanese and International Economies, Elsevier, vol. 19(1), pages 37-50, March.
  7. Shimasawa, Manabu & Sadahiro, Akira, 2009. "Policy reform and optimal inflation rate for Japan in computable OLG economy," Economic Modelling, Elsevier, vol. 26(2), pages 379-384, March.
  8. Mark A. Wynne, 2008. "How should central banks define price stability?," Globalization and Monetary Policy Institute Working Paper 08, Federal Reserve Bank of Dallas.

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