Generating Non-Standard Multivariate Distributions with an Application to Mismeasurement in the CPI

Abstract

This paper shows how to generate the joint distribution of correlated random variables with specified marginal distributions. For cases where the marginal distributions are either normal or lognormal, it shows how to calculate analytically the correlation of the underlying normal distributions to induce the desired correlation between the variables. It also provides a method for calculating the joint distribution in the case of arbitrary marginal distributions. The paper applies the technique to calculating the distribution of the overall bias in the consumer price index. The technique should also be applicable to estimation by simulated moments or simulated likelihoods and to Monte Carlo analysis.