Kenneth W. Clements () (Department of Economics, The University of Western Australia) H.Y Izan (Department of Economics, The University of Western Australia) E Antony Selvanathan (School of International Business, Griffith University)
Abstract
The stochastic approach is a new way of viewing index numbers in which uncertainty and statistical ideas play a central role. Rather than just providing a single number for the rate of inflation, the stochastic approach provides the whole probability distribution of inflation. This paper reviews the key elements of the approach and then discusses some previously overlooked links with Fisher’s early work contained in his book The Making of Index Numbers. We then consider some more recent developments, including Diewert’s well-known critique of the stochastic approach, and provide responses to his criticisms. We also provide a review of Theil’s work on the stochastic approach, and present and extend Diewert’s work on this topic within the context of the Country Product Dummy method which measures price levels internationally.
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Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number
05-08.
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