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Generalized Logarithmic Index Numbers with Demand Shocks: Bridging the Gap between Theory and Practice

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  • Abe, Naohito
  • Rao, D.S.Prasada

Abstract

There has long been a gap between theory and practice for measuring aggregate price changes. As Samuelson and Swamy (1974, AER) stated, deflators must satisfy transitivity to make real consumption expenditures consistent with consumer theory. To date, few well-known indices are transitive. Building on Redding and Wenstein (2020), we consider a generalized logarithmic index with demand shocks and establish its monotonicity and transitivity properties, which fills the gap. We also derive conditions under which the logarithmic price index is unique. Analysis of Japanese weekly scanner data shows that the traditional chained Sato-Vartia index has 4.86 percent downward bias per annum.

Suggested Citation

  • Abe, Naohito & Rao, D.S.Prasada, 2020. "Generalized Logarithmic Index Numbers with Demand Shocks: Bridging the Gap between Theory and Practice," RCESR Discussion Paper Series DP20-1, Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:rcesrs:dp20-1
    Note: 28 June, 2020
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    References listed on IDEAS

    as
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    Cited by:

    1. Abe, Naohito & Inoue, Toshikatsu & Sato, Hideyasu, 2020. "Price Index Numbers Under Large-Scale Demand Shocks: The Japanese Experience of the COVID-19 Pandemic," RCESR Discussion Paper Series DP20-2, Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University.

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    More about this item

    Keywords

    Price comparisons; Preference Heterogeneity; Logarithmic Indices; Transitivity; Scanner Data; Chain Drift;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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