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The Stochastic Approach to Index Numbers: Needless and Useless

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  • von der Lippe, Peter

Abstract

The New Stochastic Approach (NSA) – unjustly – pretends to promote a better understanding of price index (PI) formulas by viewing them as regression coefficients. As prices in the NSA are assumed to be collected in a random sample (what is particularly at odds with official price statistics), PIs are random variables so that not only a point estimate but also an interval estimate of a PI can be provided. However this often praised "main advantage" of the NSA is hardly of any use from a practical point of view. In the NSA goodness of fit is confused with adequacy of a PI formula. Regression models are mostly farfetched, stipulate restrictive and unrealistic assumptions, replicate only already known PI formulas and they say nothing about axioms satisfied or violated by a PI.

Suggested Citation

  • von der Lippe, Peter, 2014. "The Stochastic Approach to Index Numbers: Needless and Useless," MPRA Paper 60839, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:60839
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    File URL: https://mpra.ub.uni-muenchen.de/60839/1/MPRA_paper_60839.pdf
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    References listed on IDEAS

    as
    1. Clements, Kenneth W & Izan, H Y, 1987. "The Measurement of Inflation: A Stochastic Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(3), pages 339-350, July.
    2. Lippe Peter Michael von der, 2013. "Recurrent Price Index Problems and Some Early German Papers on Index Numbers: Notes on Laspeyres, Paasche, Drobisch, and Lehr," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(3), pages 336-366, June.
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    Cited by:

    1. Okorie Charity Ebelechukwu & Gladys Andrew & Ben Johnson, 2019. "Comparative Analysis of Some Selected Domestic Commodities Using Four Methods of Price Index (A Case Study of Taraba State for Period Of 2008-2016)," Biostatistics and Biometrics Open Access Journal, Juniper Publishers Inc., vol. 9(4), pages 81-85, April.

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    More about this item

    Keywords

    Index theory. price index; Inflation measurement; regression; methodoloy of collecting macroeconomic data;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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