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Quantifying the Measurement Bias in Official CPI Statistics

Explore sources of measurement errors in CPI data, assess components affecting price index accuracy, and suggest solutions to address biases for better economic statistics.

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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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