Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/192850 
Authors: 
Year of Publication: 
2017
Series/Report no.: 
Discussion Papers No. 868
Publisher: 
Statistics Norway, Research Department, Oslo
Abstract: 
Decompositions of international price indices are usually inexact in the sense that the underlying aggregator formula is not exactly reproduced. In this paper, we compare analytically the exact and inexact decompositions of international price indices, paying particular attention to the bias in aggregate inflation occurring from using the first order Taylor series approximation and not the quadratic approximation lemma to a geometric average of price levels. Our calculations, using the Norwegian clothing industry as an illustration, reveal that the bias in aggregate inflation over the sample period of 1997−2016 is quite substantial and as high as 0.5 percentage points in some years. We therefore conclude that the quadratic approximation lemma should be used in practise to exactly reproduce the underlying aggregator formula.
Subjects: 
International price indices
exact and inexact decompositions
first and second order Taylor series approximation
quadratic approximation lemma
bias in aggregate inflation
JEL: 
C43
E31
F14
Document Type: 
Working Paper

Files in This Item:
File
Size
4.95 MB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.