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The treatment of substitution bias in consumer price index: An alternative approach

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  • Ignazio Drudi

    (University of Bologna)

Abstract

Substitution bias is a well-known problem in fixed-basket price indices. When a new product substitutes an old one, the most of statistical agencies adopt anad hoc strategy, using the ratio between prices of the two goods (in a previous period) as a measure of quality change. In the present work we propose an alternative way to manage substitution that can be easily included in the computation process of the index. Price survey is a pure panel survey, and then substitution may be considered as an attrition problem and faced using the estimator for panels with partial overlap. After a brief description of the problem and of the suggested formula, an experimental application is presented. The application is based on about 771 elementary prices collected in Milano in March 1997. Main results are that in each category of consumption the two approaches show significant differences in the micro-indices, at the aggregated level, that is when weights are used to combine micro-indices, the differences agree with the conclusions of Boskin’s report.

Suggested Citation

  • Ignazio Drudi, 2002. "The treatment of substitution bias in consumer price index: An alternative approach," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 11(3), pages 395-404, October.
    • Handle: RePEc:spr:stmapp:v:11:y:2002:i:3:d:10.1007_bf02509834
    DOI: 10.1007/BF02509834
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    References listed on IDEAS

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    1. Moulton, Brent R & Stewart, Kenneth J, 1999. "An Overview of Experimental U.S. Consumer Price Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 141-151, April.
    2. Duggan, James E & Gillingham, Robert, 1999. "The Effect of Errors in the CPI on Social Security Finances," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 161-169, April.
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