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Chain indices of the cost-of-living and the path-dependence problem: An empirical solution

  • Oulton, Nicholas

This paper proposes a new method for estimating true cost-of-living (Konüs) indices, for large numbers of commodities, using data only on prices, aggregate budget shares and aggregate expenditure. Conventional chain indices are path-dependent unless income elasticities are (implausibly) all equal to 1. The method allows this difficulty to be overcome. I show that to estimate a Konüs index, only income and not price elasticities are required. The method is applied to estimate a Konüs price index for 70 products covering nearly all the UK's Retail Prices Index over 1974-2004, using the Quadratic Almost Ideal Demand System. The choice of base year for utility has a significant effect on the index.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 144 (2008)
Issue (Month): 1 (May)
Pages: 306-324

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Handle: RePEc:eee:econom:v:144:y:2008:i:1:p:306-324
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. Anthony J. Venables, 2006. "Shifts in economic geography and their causes," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 15-39.
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  12. Nicholas Oulton, 2007. "Chain Indices of the Cost of Living and the Path-Dependence Problem: An Empirical Solution," CEP Discussion Papers dp0797, Centre for Economic Performance, LSE.
  13. J. Peter Neary, 2004. "Rationalizing the Penn World Table: True Multilateral Indices for International Comparisons of Real Income," American Economic Review, American Economic Association, vol. 94(5), pages 1411-1428, December.
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