When Does Chaining Reduce the Paasche-Laspeyres Spread? An Application to Scanner Data

17 Pages Posted: 30 May 2006

See all articles by Robert J. Hill

Robert J. Hill

UNSW Australia Business School, School of Economics

Abstract

It is generally believed that chaining reduces the Paasche-Laspeyres spread if prices and quantities are monotonic over time. I consider three alternative definitions of monotonicity and show that none provide either necessary or sufficient conditions for chaining to reduce the Paasche-Laspeyres spread. What matters is the interaction between prices and quantities both in the same period and lagged one period. Sufficient conditions are derived, and the implications of these conditions for the measurement of inflation are considered. The paper concludes with an empirical illustration using scanner data.

Suggested Citation

Hill, Robert James, When Does Chaining Reduce the Paasche-Laspeyres Spread? An Application to Scanner Data. Review of Income and Wealth, Vol. 52, No. 2, pp. 309-325, June 2006, Available at SSRN: https://ssrn.com/abstract=904922 or http://dx.doi.org/10.1111/j.1475-4991.2006.00189.x

Robert James Hill (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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