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Stochastic Index Numbers: A Review

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Author Info

  • 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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File URL: http://www.biz.uwa.edu.au/home/research/discussionworking_papers/economics/2005?f=148853
File Function: First version, 2005
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Bibliographic Info

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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Length: 41 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:uwa:wpaper:05-08

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Cited by:
  1. Michal Brzoza-Brzezina & Jesus Crespo Cuaresma, 2007. "Mr. Wicksell and the global economy: What drives real interest rates?," Working Papers 2007-06, Faculty of Economics and Statistics, University of Innsbruck.
  2. Clements, Kenneth W. & Gao, Grace, 2012. "Quality, quantity, spending and prices," European Economic Review, Elsevier, vol. 56(7), pages 1376-1391.
  3. Ferreira, Alex Luiz & Leon-Ledesma, Miguel A., 2007. "Does the real interest parity hypothesis hold? Evidence for developed and emerging markets," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 364-382, April.
  4. Diewert, Erwin, 2012. "Irving Fisher and Index Number Theory," UBC Departmental Archives erwin_diewert-2012-9, UBC Department of Economics, revised 01 Mar 2012.
  5. Arghyrou, Michael G & Gregoriou, Andros & Kontonikas, Alexandros, 2007. "Do real interest rates converge? Evidence from the European Union," Cardiff Economics Working Papers E2007/26, Cardiff University, Cardiff Business School, Economics Section.
  6. Salah A. Nusair, 2006. "Real Interest Rate Parity: Evidence from Industrialized Countries," Annals of Economics and Finance, Society for AEF, vol. 7(2), pages 425-457, November.
  7. Kenneth W. Clements & H.Y Izan & Yihui Lan, 2005. "A Stochastic Measure of International Competitiveness," Economics Discussion / Working Papers 05-15, The University of Western Australia, Department of Economics.

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