A Novel Multi-Period and Multilateral Price Index

TL;DR

This paper introduces a new multi-period and multilateral price index based on a generalized least squares regression approach, offering broader coverage and improved performance over existing indices.

Contribution

It presents a novel price index methodology that generalizes existing approaches, with a broader reference basket and proven superior performance through applications.

Findings

Index has broader coverage than existing indices.

The index outperforms extant alternatives in real and simulated data.

Properties and updating formulas of the index are thoroughly analyzed.

Abstract

A novel approach to price indices, leading to an innovative solution in both a multi-period or a multilateral framework, is presented. The index turns out to be the generalized least squares solution of a regression model linking values and quantities of the commodities. The index reference basket, which is the union of the intersections of the baskets of all country/period taken in pair, has a coverage broader than extant indices. The properties of the index are investigated and updating formulas established. Applications to both real and simulated data provide evidence of the better index performance in comparison with extant alternatives.