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CPI Mismeasurements and Their Impacts on Economic Management in Korea

  • Chul Chung

    (Korea International Trade Association, Washington, DC 20036 USA and Korea Institute for International Economic Policy, Seoul 137-747, Korea.)

  • John Gibson

    (Department of Economics, University of Waikato, Private Bag 3105, Hamilton, New Zealand.)

  • Bonggeun Kim

    (Department of Economics, Seoul National University, 599 Gwanak-no, Gwanak-gu, Seoul 151-746, Korea.)

We estimate the consumer price index (CPI) bias in Korea by employing the approach of Engel's Law as suggested by Hamilton (2001). Using Korean panel data (Korean Labor and Income Panel Study) and following Hamilton's model with a non-linear specification correction, our estimation result shows that the CPI bias over the sample period (2000-05) averaged at least 0.7 percent annually, which implies that about 21 percent of the inflation rate during the sample period can be attributed to the bias. This CPI bias has caused a substantial understatement of the growth in real GDP and contributes to excessive transfers from younger taxpayers to the elderly through indexed pension payments. We discuss the implications of the CPI bias for economic management and policies in Korea. (c) 2010 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Asian Economic Papers.

Volume (Year): 9 (2010)
Issue (Month): 1 (January)
Pages: 1-15

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Handle: RePEc:tpr:asiaec:v:9:y:2010:i:1:p:1-15
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