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Substitution Bias in Multilateral Methods for CPI Construction using Scanner Data

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  • Diewert, W. Erwin
  • Fox, Kevin J.

Abstract

The use of multilateral comparison methods in a time series context is increasingly becoming an accepted approach for incorporating scanner data in a Consumer Price Index. The attractiveness stems from the ability to be able to control for chain drift bias. Consensus on two key issues has yet to be achieved: (i) the best multilateral method to use, and (ii) the best way of extending the resulting series when new observations become available. This paper presents theoretical and simulation evidence on the extent of substitution biases in alternative multilateral methods. The multilateral index number formulae studied include the GEKS, CCDI, Geary-Khamis and Weighted Time Product Dummy Methods as well as some price similarity linking methods. The paper also assesses alternative methods for extending non-revisable series, with particular regard to the possibility of introducing chain drift bias. Overall, our results suggest the use of the CCDI index with a new method, the “mean splice†, for updating.

Suggested Citation

  • Diewert, W. Erwin & Fox, Kevin J., 2017. "Substitution Bias in Multilateral Methods for CPI Construction using Scanner Data," Microeconomics.ca working papers erwin_diewert-2017-3, Vancouver School of Economics, revised 23 Mar 2017.
  • Handle: RePEc:ubc:pmicro:erwin_diewert-2017-3
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    References listed on IDEAS

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    1. Ivancic, Lorraine & Erwin Diewert, W. & Fox, Kevin J., 2011. "Scanner data, time aggregation and the construction of price indexes," Journal of Econometrics, Elsevier, vol. 161(1), pages 24-35, March.
    2. Hill, Robert J, 1997. "A Taxonomy of Multilateral Methods for Making International Comparisons of Prices and Quantities," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 43(1), pages 49-69, March.
    3. D. S. Prasada Rao, 2005. "On The Equivalence Of Weighted Country-Product-Dummy (Cpd) Method And The Rao-System For Multilateral Price Comparisons," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 51(4), pages 571-580, December.
    4. Robert J. Hill, 2004. "Constructing Price Indexes across Space and Time: The Case of the European Union," American Economic Review, American Economic Association, vol. 94(5), pages 1379-1410, December.
    5. Kevin Fox & Robert Hill & W. Diewert, 2004. "Identifying Outliers in Multi-Output Models," Journal of Productivity Analysis, Springer, vol. 22(1), pages 73-94, July.
    6. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    7. Balk,Bert M., 2012. "Price and Quantity Index Numbers," Cambridge Books, Cambridge University Press, number 9781107404960, December.
    8. W. Erwin Diewert, 1999. "Axiomatic and Economic Approaches to International Comparisons," NBER Chapters,in: International and Interarea Comparisons of Income, Output, and Prices, pages 13-107 National Bureau of Economic Research, Inc.
    9. Allen, Robert C & Diewert, W Erwin, 1981. "Direct versus Implicit Superlative Index Number Formulae," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 430-435, August.
    10. Robert C. Feenstra & Matthew D. Shapiro, 2003. "Introduction to "Scanner Data and Price Indexes"," NBER Chapters,in: Scanner Data and Price Indexes, pages 1-14 National Bureau of Economic Research, Inc.
    11. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    12. Erwin Diewert, 2005. "Weighted Country Product Dummy Variable Regressions And Index Number Formulae," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 51(4), pages 561-570, December.
    13. Robert C. Feenstra & Matthew D. Shapiro, 2003. "Scanner Data and Price Indexes," NBER Books, National Bureau of Economic Research, Inc, number feen03-1, January.
    14. Robert J. Hill, 1999. "Comparing Price Levels across Countries Using Minimum-Spanning Trees," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 135-142, February.
    15. Inklaar, Robert & Diewert, W. Erwin, 2016. "Measuring industry productivity and cross-country convergence," Journal of Econometrics, Elsevier, vol. 191(2), pages 426-433.
    16. Sato, Kazuo, 1976. "The Ideal Log-Change Index Number," The Review of Economics and Statistics, MIT Press, vol. 58(2), pages 223-228, May.
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    More about this item

    Keywords

    Consumer Price Indexes; superlative indexes; chain drift; scanner data; Time Product Dummy method; Geary-Khamis; GEKS and CCDI methods for making inte;

    JEL classification:

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

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