Journal of Official Statistics, Vol.17, No.3, 2001. pp. 369–390
Finite Sample Effects in the Estimation of Substitution Bias in the Consumer Price Index
Abstract:Since it does not allow for substitution effects, the U.S. Consumer Price Index (CPI) has been criticized for overstating the Cost of Living increase. Previous studies estimate substitution bias by differencing a superlative index and the Laspeyres. However, both the Laspeyres and the superlative indexes are nonlinear in prices, and are subject to finite sample bias. This study shows that these previous estimates of the CPI's substitution bias are overstated because of the finite sample effects.
Keywords:Substitution bias; superlative indexes.
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