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The Path-Dependence Bias in Approximating Local Price Levels by CPIs

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  • Gluschenko, Konstantin

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.

Suggested Citation

  • Gluschenko, Konstantin, 2016. "The Path-Dependence Bias in Approximating Local Price Levels by CPIs," MPRA Paper 68936, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68936
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    File URL: https://mpra.ub.uni-muenchen.de/68936/1/MPRA_paper_68936.pdf
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    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Riemer P. Faber & Ad C. J. Stokman, 2009. "A Short History of Price Level Convergence in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 461-477, March.
    3. repec:zbw:bofitp:2006_009 is not listed on IDEAS
    4. Chen, L. L. & Devereux, J., 2003. "What can US city price data tell us about purchasing power parity?," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 213-222, April.
    5. Samuelson, Paul A & Swamy, S, 1974. "Invariant Economic Index Numbers and Canonical Duality: Survey and Synthesis," American Economic Review, American Economic Association, vol. 64(4), pages 566-593, September.
    6. Laura Solanko, 2008. "Unequal fortunes: a note on income convergence across Russian regions," Post-Communist Economies, Taylor & Francis Journals, vol. 20(3), pages 287-301.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. K. P. Gluschenko, 2022. "Costs of Living and Real Incomes in the Russian Regions," Regional Research of Russia, Springer, vol. 12(3), pages 365-377, September.

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    More about this item

    Keywords

    spatial price index; inflation; Divisia index; nonhomothetic preferences; demand system;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • R19 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Other

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