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Constructing Quality Adjusted Price Indexes: a Comparison of Hedonic and Discrete Choice Models

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N. Jonker

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Abstract

The Boskin report (1996) concluded that the US consumer price index (CPI) overestimated the inflation by 1.1 percentage points. This was due to several measurement errors in the CPI. One of them is called quality change bias. In this paper two methods are compared which can be used to eliminate quality change bias, namely the hedonic method and a method based on the use of discrete choice models. The underlying micro-economic fundations of the two methods are compared as well as their empirical implementation. Although the discrete choice model has not often been used in order to calculate quality adjusted price indexes it seems to be quite promising to do so.

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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 673.

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Date of creation: 2001
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Handle: RePEc:dnb:wormem:673

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Related research
Keywords: logit models; cpi; consumenter behaviour; producer behaviour;

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Find related papers by JEL classification:
C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. C. Deligiorgi & A. Vavoulas & Ch. Michalakelis & D. Varoutas & Th. Sphicopoulos, 2007. "On the construction of price index and the definition of factors affecting tariffs of ADSL connections across Europe," Netnomics, Springer, vol. 8(1), pages 171-183, October. [Downloadable!] (restricted)
  2. Henning Ahnert & Geoff Kenny, 2004. "Quality adjustment of European price statistics and the role for hedonics," Occasional Paper Series 15, European Central Bank. [Downloadable!]
  3. John K. Dagsvik, Astrid L. Mathiassen and Bengt J.Eriksson, 2006. "Quality adjusted price indexes for discrete goods," Discussion Papers 490, Research Department of Statistics Norway. [Downloadable!]
  4. Lutz Kilian & Atsushi Inoue, 2003. "On the selection of forecasting models," Working Paper Series 214, European Central Bank. [Downloadable!]
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