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Measuring CPI's reliability: the stochastic approach to index numbers revisited

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  • Kuo-Yuan Liang
  • Chen-Hui Yen

Abstract

The reliability measurement of the Consumer Price Index (CPI) has recently drawn much attention, as the index number has been criticized for its inaccuracy in accessing the degree of inflation. This article centers on providing a new regression specification that can help better gauge the CPI's reliability. More specifically, based on the stochastic approach to index numbers, we argue that the conventional treatment of the systematic changes in relative prices should be made time variant. We therefore propose a more comprehensive regression specification by including additional dummies that represent different general inflation rate levels and business cycle phases. Under this framework, we are more capable of avoiding possible misspecifications in the regression equation, as was experienced by Clements and Izan (1987). It also allows us to better answer the ‘Keynes’ critic’ regarding the stochastic approach to index numbers. The empirical results of Australia and the US are used to validate the merit of our specification.

Suggested Citation

  • Kuo-Yuan Liang & Chen-Hui Yen, 2013. "Measuring CPI's reliability: the stochastic approach to index numbers revisited," Applied Economics, Taylor & Francis Journals, vol. 45(20), pages 2894-2908, July.
    • Handle: RePEc:taf:applec:v:45:y:2013:i:20:p:2894-2908
    DOI: 10.1080/00036846.2012.687097
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    References listed on IDEAS

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    1. Frederick C. Mills, 1927. "Introduction to "The Behavior of Prices"," NBER Chapters, in: The Behavior of Prices, pages 31-36, National Bureau of Economic Research, Inc.
    2. Frederick C. Mills, 1927. "The Behavior of Prices," NBER Books, National Bureau of Economic Research, Inc, number mill27-1.
    3. Frederick C. Mills, 1927. "Appendix to "The Behavior of Prices"," NBER Chapters, in: The Behavior of Prices, pages 441-586, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Xiao, Jiang & Wang, Minggang & Tian, Lixin & Zhen, Zaili, 2018. "The measurement of China’s consumer market development based on CPI data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 490(C), pages 664-680.

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