Substitution biases in price indices during transition

Article type: Research Article

Authors: Hanousek, Jan^{; *} | Filer, Randall K.

Affiliations: Politických veznu 7, 111 21 Prague 1, Czech Republic

Correspondence: [*] Corresponding author. Tel.: +420 2 240 05 153; Fax: +420 2 242 11 374; E-mail: jan.hanousek@cerge.cuni.cz

Abstract: The rapidly changing environment of economic transition may create special problems for calculation of index numbers that require a fixed basket of goods and retail outlets. Using referent-level data we find that fixed-weight Laspeyres index on average overstated cost of living increases by approximately 5 percent a year when compared with a superlative index in the Czech Republic. This difference is smaller than might be expected given the large changes in relative prices that occurred during transition and suggests that consumer substitution impacts may have been largely offset by other factors, especially rising prices combined with increased consumption of some goods as artificial shortages under communism were removed. Indeed, in the period of growing supply in response to price liberalization, the Laspeyres index appears to understate increases in the cost of living.

Keywords: CPI bias, formula bias, price liberalization, substitution bias, transition economies

DOI: 10.3233/SJU-2004-21208

Journal: Statistical Journal of the United Nations Economic Commission for Europe, vol. 21, no. 2, pp. 167-177, 2004