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Stochastic Index Numbers: A Review

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  • Kenneth W. Clements

    () (Department of Economics, The University of Western Australia)

  • H.Y Izan

    (Department of Economics, The University of Western Australia)

  • E Antony Selvanathan

    (School of International Business, Griffith University)

Abstract

The stochastic approach is a new way of viewing index numbers in which uncertainty and statistical ideas play a central role. Rather than just providing a single number for the rate of inflation, the stochastic approach provides the whole probability distribution of inflation. This paper reviews the key elements of the approach and then discusses some previously overlooked links with Fisher’s early work contained in his book The Making of Index Numbers. We then consider some more recent developments, including Diewert’s well-known critique of the stochastic approach, and provide responses to his criticisms. We also provide a review of Theil’s work on the stochastic approach, and present and extend Diewert’s work on this topic within the context of the Country Product Dummy method which measures price levels internationally.

Suggested Citation

  • Kenneth W. Clements & H.Y Izan & E Antony Selvanathan, 2005. "Stochastic Index Numbers: A Review," Economics Discussion / Working Papers 05-08, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:05-08
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    File URL: http://www.biz.uwa.edu.au/home/research/discussionworking_papers/economics/2005?f=148853
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    Citations

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    Cited by:

    1. Rao, D.S. Prasada & Hajargasht, Gholamreza, 2016. "Stochastic approach to computation of purchasing power parities in the International Comparison Program (ICP)," Journal of Econometrics, Elsevier, vol. 191(2), pages 414-425.
    2. Ferreira, Alex Luiz & Leon-Ledesma, Miguel A., 2007. "Does the real interest parity hypothesis hold? Evidence for developed and emerging markets," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 364-382, April.
    3. Kenneth W Clements & Grace Gao, 2013. "A Multi-Market Approach to Measuring the Cycle," Economics Discussion / Working Papers 13-16, The University of Western Australia, Department of Economics.
    4. Michal Brzoza-Brzezina & Jesus Crespo Cuaresma, 2007. "Mr. Wicksell and the global economy: What drives real interest rates?," Working Papers 2007-06, Faculty of Economics and Statistics, University of Innsbruck.
    5. Arghyrou, Michael G. & Gregoriou, Andros & Kontonikas, Alexandros, 2009. "Do real interest rates converge? Evidence from the European union," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(3), pages 447-460, July.
    6. Clements, Kenneth W. & Gao, Grace, 2012. "Quality, quantity, spending and prices," European Economic Review, Elsevier, vol. 56(7), pages 1376-1391.
    7. Gabriela OPAIT, 2012. "The Role of the Continuous Variables Indices in the Life -Testing Research," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 3, pages 93-102.
    8. Salah A. Nusair, 2006. "Real Interest Rate Parity: Evidence from Industrialized Countries," Annals of Economics and Finance, Society for AEF, vol. 7(2), pages 425-457, November.
    9. Kenneth W. Clements & H.Y Izan & Yihui Lan, 2005. "A Stochastic Measure of International Competitiveness," Economics Discussion / Working Papers 05-15, The University of Western Australia, Department of Economics.

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