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Retrospective Price Indices and Substitution Bias


The consumer price index (CPI) is usually computed as a fixed-weighted Laspeyres price index, with the weights updated at discrete intervals only. It is well known that the Laspeyres functional form entails a substitution bias. One way to reduce it would be to use chained indices, and superlative ones if possible. Unfortunately, the necessary data are often missing. This paper proposes a simple method to retroactively compute the CPI once updated weights become available. The proposed index has the Fisher form. This makes it possible to assess the size of the substitution bias. An application to Swiss data is provided.


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This paper was written while Huwiler was at the Swiss National Bank, Economic Analysis Unit.

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Diewert, W.E., Huwiler, M. & Kohli, U. Retrospective Price Indices and Substitution Bias. Swiss J Economics Statistics 145, 127–135 (2009).

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