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The substitution bias of the consumer price index

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Abstract

The paper uses elementary consumer theory to propose an inflation independent ratio definition of the substitution bias of the Laspeyres consumer price index, and derives an approximate substitution bias which depends on the size of the price change as measured by a norm in the Laspeyres plane and on the elasticity of substitution in the direction of the price change. This norm or distance measure can be interpreted as a price substitution index which yields useful information about the movements of relative prices. Norwegian CPI data are used to quantify these relationships.

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  • Petter Frenger, 2006. "The substitution bias of the consumer price index," Discussion Papers 451, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:451
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    More about this item

    Keywords

    consumer price index (CPI); substitution bias; elasticity of substitution.;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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