Chain Indices Of The Cost Of Living And The Path-Dependence Problem: An Empirical Solution

Topics:
Organization
Tags:
Finance,
Indice,
Operational Accounting
Source:
London School of Economics and Political Science

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Overview: This paper proposes an empirically feasible method for correcting the path-dependence bias of chain indices of the cost of living. Chain indices are discrete approximations to Divisia indices and it is well known that the latter are path-dependent: the level of a Divisia index is affected not just by the level of prices at the two endpoints but also by the path between the endpoints. It is also well-known that a Divisia index of the cost of living is path-independent if and only if all income elasticities are equal to one, a restriction that is decisively rejected by studies of consumer demand. In theory, the true cost of living index (or Konus price index) could be derived by estimating the expenditure function.

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Format: PDF | Size: 584KB | Date: May 2007 | Pages: 38

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