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Extending the stochastic approach to index numbers

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  • Paul Crompton
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    Abstract

    The variance of the inflation rate estimator in the stochastic approach of Clements and Izan will be biased in most applications due to stringent restrictions on the variance of the OLS error term. To overcome this weakness, the stochastic methodology is reformulated and extended by deriving a variance estimator which is robust to unknown forms of heteroscedasticity. Under this new approach the exact nature of the error variance is of no concern, and can remain unidentified. A major innovation of this work is the derivation of a scalar representation for the variance estimator which has considerable intuitive appeal since it uses consumer expenditure shares to weight the relative price movements used in the calculation of the inflation rate variances.

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    File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/135048500351294&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

    Volume (Year): 7 (2000)
    Issue (Month): 6 ()
    Pages: 367-371

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    Handle: RePEc:taf:apeclt:v:7:y:2000:i:6:p:367-371

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    Cited by:
    1. Iqbal, Javed & Hanif, Muhammad Nadim, 2010. "Measuring Standard Error of Inflation in Pakistan: A Stochastic Approach," MPRA Paper 35422, University Library of Munich, Germany.
    2. David E. A. Giles, 2002. "Calculating a Standard Error for the Gini Coefficient: Some Further Results," Econometrics Working Papers 0202, Department of Economics, University of Victoria.
    3. Eliyathamby A. Selvanathan & Saroja Selvanathan, 2006. "Measurement of inflation: An alternative approach," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 403-418, November.
    4. Selvanathan, E. A. & Selvanathan, S., 2004. "Modelling the commodity prices in the OECD countries: a stochastic approach," Economic Modelling, Elsevier, vol. 21(2), pages 233-247, March.

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