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Using Engel Curves to Measure CPI Bias for Indonesia

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  • Susan Olivia

    ()

  • John Gibson

Abstract

To measure real income growth over time a price index is needed to adjust for changes in the cost of living. The Consumer Price Index (CPI) is often used for this task but studies from several countries show the CPI is a biased measure of changes in the cost of living, leading to potentially wrong estimates of the rate of growth of real income in this paper CPI bias for Indonesia is calculated by estimating food Engel curves for households with the same level of CPI-deflated incomes at four different points in time between 1993 and 2008. The results suggest CPI bias was initially negative during the Asian Crisis but has been positive since 2000. Over the entire period, CPI bias has averaged four precent annually, equivalent to almost one third of the measured inflation rate.

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Bibliographic Info

Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 13/12.

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Length: 24 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:msh:ebswps:2012-13

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Keywords: CPI bias; Engel curved; Inflation Measurement error;

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References

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  1. Garry F. Barrett & Matthew Brzozowski, 2010. "Using Engel Curves to Estimate the Bias in the Australian CPI," The Economic Record, The Economic Society of Australia, vol. 86(272), pages 1-14, 03.
  2. John Gibson & Grant Scobie, 2010. "Using Engel curves to estimate CPI bias in a small, open, inflation-targeting economy," Applied Financial Economics, Taylor and Francis Journals, vol. 20(17), pages 1327-1335.
  3. Beatty, Timothy K.M. & Larsen, Erling Roed, 2004. "Using Engel Curves To Estimate Bias In The Canadian Cpi As A Cost Of Living Index," Working Papers 15836, University of British Columbia, Food and Resource Economics.
  4. John Gibson & Steven Stillman, 2004. "CPI Bias and Real Living Standards in Russia During The Transition," Econometric Society 2004 North American Summer Meetings 504, Econometric Society.
  5. Irineu E. Carvalho Filho & Marcos Chamon, 2008. "The Myth of Post-Reform Income Stagnation: Evidence from Brazil and Mexico," IMF Working Papers 08/197, International Monetary Fund.
  6. Asep Suryahadi & Sudarno Sumarto & Lant Pritchett, 2003. "Evolution of Poverty During the Crisis in Indonesia," Asian Economic Journal, East Asian Economic Association, vol. 17(3), pages 221-241, 09.
  7. Chul Chung & John Gibson & Bonggeun Kim, 2010. "CPI Mismeasurements and Their Impacts on Economic Management in Korea," Asian Economic Papers, MIT Press, vol. 9(1), pages 1-15, January.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Is the Indonesian CPI an accurate measure of the cost of living?
    by Susan Olivia in East Asia Forum on 2012-08-11 12:00:07
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Cited by:
  1. Ingvild Almås & Anders Kjelsrud & Rohini Somanathan, 2013. "A Behaviour-based Approach to the Estimation of Poverty in India," CESifo Working Paper Series 4122, CESifo Group Munich.

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