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Chain indices of the cost-of-living and the path-dependence problem: an empirical solution

Oulton, N.; (2008) Chain indices of the cost-of-living and the path-dependence problem: an empirical solution. Journal of Econometrics , 144 (1) pp. 306-324. 10.1016/j.jeconom.2008.02.001.

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Abstract

This paper proposes a new method for estimating true cost-of-living (Konüs) indices, for large numbers of commodities, using data only on prices, aggregate budget shares and aggregate expenditure. Conventional chain indices are path-dependent unless income elasticities are (implausibly) all equal to 1. The method allows this difficulty to be overcome. I show that to estimate a Konüs index, only income and not price elasticities are required. The method is applied to estimate a Konüs price index for 70 products covering nearly all the UK's Retail Prices Index over 1974–2004, using the Quadratic Almost Ideal Demand System. The choice of base year for utility has a significant effect on the index.

Type: Article
Title: Chain indices of the cost-of-living and the path-dependence problem: an empirical solution
DOI: 10.1016/j.jeconom.2008.02.001
Publisher version: http://dx.doi.org/10.1016/j.jeconom.2008.02.001
Language: English
Keywords: Index number, cost of living, divisia, konüs, chain, path-dependence, almost ideal demand system
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: http://discovery.ucl.ac.uk/id/eprint/17923
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