The substitution bias of the consumer price index
Working paper
Åpne
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http://hdl.handle.net/11250/180151Utgivelsesdato
2006Metadata
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Sammendrag
Abstract:
The paper uses elementary consumer theory to propose an inflation independent ratio definition of
the substitution bias of the Laspeyres consumer price index, and derives an approximate substitution
bias which depends on the size of the price change as measured by a norm in the Laspeyres plane
and on the elasticity of substitution in the direction of the price change. This norm or distance
measure can be interpreted as a price substitution index which yields useful information about the
movements of relative prices. Norwegian CPI data are used to quantify these relationships.
Keywords: consumer price index (CPI), substitution bias, elasticity of substitution