Reliability of Ideal Indexes

TL;DR

This paper develops reliability measures for the Fisher and GEKS indexes, which are key in economic statistics like CPI and PPP, and demonstrates their application using 2017 ICP data across 173 countries.

Contribution

It introduces the first stochastic reliability measures for the Fisher and GEKS indexes, enhancing their interpretability and practical use in economic analysis.

Findings

Reliability measures for Fisher and GEKS indexes are derived and explained.

Application to 2017 ICP data demonstrates the indexes' reliability and comparison with other indexes.

Implications for economic statistics and index selection are discussed.

Abstract

The Fisher and GEKS are celebrated as ideal bilateral and multilateral indexes due to their superior axiomatic and econ-theoretic properties. The Fisher index is the main index used for constructing CPI by statistical agencies and the GEKS is the index used for compiling PPPs in World Bank's International Comparison Program (ICP). Despite such a high status and the importance attached to these indexes, the stochastic approach to these indexes is not well-developed and no measures of reliability exist for these important economic statistics. The main objective of this paper is to fill this gap. We show how appropriate reliability measures for the Fisher and GEKS indexes, and other ideal price index numbers can be derived and how they should be interpreted and used in practice. In an application to 2017 ICP data on a sample of 173 countries, we estimate the Fisher and GEKS indexes along with their reliability measures, make comparisons with several other notable indexes and discuss the implications.