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dc.contributor.authorHobijn, Barten_US
dc.description.abstractIt is often argued that price indexes do not fully capture the quality improvements of new goods in the market. Because of this shortcoming, price indexes are perceived to overestimate the actual price increases that occur. In this paper, I argue that the quality bias in price indexes is just as likely to be upward as it is to be downward. I show how both the sign and the magnitude of the quality bias in the most commonly applied price index methods are determined by the cross-sectional variation of prices per quality unit across the product models sold in the market. I do so by simulating a model of a market that includes monopolistically competing suppliers of the various product models and a representative consumer with CES (constant elasticity of substitution) preferences. I illustrate the bias in the commonly applied price index methods by comparing their estimates of inflation with the theoretical inflation rate implied by the data-generating process.en_US
dc.publisherFederal Reserve Bank of New York New York, NYen_US
dc.relation.ispartofseriesStaff Report, Federal Reserve Bank of New York 157en_US
dc.subject.keywordPrice index theory, hedonic price methods, quality bias, monopolistic competitionen_US
dc.subject.stwMonopolistischer Wettbewerben_US
dc.subject.stwHedonischer Preisindexen_US
dc.titleOn both sides of the quality bias in price indexesen_US
dc.typeWorking Paperen_US
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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