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Quantifying the Measurement Bias in Official CPI Statistics

Quantifying the Measurement Bias in Official CPI Statistics. SEACEN-IFC Workshop October 14, 2009 Shigenori SHIRATSUKA Bank of Japan. Measurement Errors in the CPI. Inevitable: Not census, but survey with adjustments

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Quantifying the Measurement Bias in Official CPI Statistics

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  1. Quantifying the Measurement Bias in Official CPI Statistics SEACEN-IFC Workshop October 14, 2009 Shigenori SHIRATSUKA Bank of Japan

  2. Measurement Errors in the CPI • Inevitable: • Not census, but survey with adjustments • Some measurement errors at various steps in CPI compilation (price survey, weighting,…) • Magnitude: • Varies depending on economic conditions, compilation methods,… • Changes all the time • Important to make regular assessment

  3. Sources of Measurement Errors Quantitative Assessment Components of Price index Price index formula Substitution effects • Index formula for aggregating the upper level items • Aggregation of individual prices surveyed into item levels • Upper level substitution • Lower level substitution Quality changes Accuracy of prices surveyed • Quality-adjustment methods • Price survey method • Structural changes in retail markets • Service prices: imputed rent and medical expenses New products Outlet substitutions Accuracy of weights Others • Coverage of Expenditure Survey

  4. Quantification of ME • Many Previous Studies: • Guesstimation: • Make a best estimate with readily available empirical studies, including studies in other economies • But, careful account for country-specific factors

  5. Guesstimation (Economy-A) (Economy-B) Sources of ME Sources of ME common Economic Structure + Compilation Methods of CPI Economic Structure + Compilation Methods of CPI different Magnitude of U-Biases Magnitude of U-Biases different

  6. How to Address ME Problem • Aggregation into an Overall Index • Substitution effects • Workable solutions: Approximation of superlative index formula in a real time basis • Measurement of Individual Prices • Quality adjustment, New products, … • Difficult issues in both conceptual and practical basis: decomposition of nominal value into quantity and q-adjusted price

  7. Quality Adjustment • Hedonic method: • An effective way to make quality adjustments • But, not necessarily a panacea • In Japan, applied to PC and digital camera from 2000-base CPI • US stopped using the hedonic for PC!!! • Choice of the Method: • Alternative methods • Cost-efficiency examination for each product

  8. Conclusions • Regular Assessment: • Dynamic changes in the economy • Magnitude of ME • Minimized? Accurate enough? • Careful account for country-specific factors • Cost effective solutions • Allocate limited resources efficiently to create better statistics • Esp., individual price measurement

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