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August 2006 Stochastic Index Numbers: A Review
Kenneth W. Clements, Izan H.Y. Izan, E. Antony Selvanathan
Internat. Statist. Rev. 74(2): 235-270 (August 2006).


The stochastic approach is a new way of viewing index numbers in which uncertainty and statistical ideas play a central role. Rather than just providing a single number for the rate of inflation, the stochastic approach provides the whole probability distribution of inflation. This paper reviews the key elements of the approach and then discusses its early history, including some previously overlooked links with Fisher's work contained in his book The Making of Index Numbers. We then consider some more recent developments, including Diewert's well-known critique of the stochastic approach, and provide responses to his criticisms. We also provide a review of Theil's work on the stochastic approach, and present and extend Diewert's work on this topic within the context of the Country Product Dummy method which measures price levels internationally. The paper also contains some recent material on the value of information from the perspective of the stochastic approach, as well as illustrative applications.


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Kenneth W. Clements. Izan H.Y. Izan. E. Antony Selvanathan. "Stochastic Index Numbers: A Review." Internat. Statist. Rev. 74 (2) 235 - 270, August 2006.


Published: August 2006
First available in Project Euclid: 24 July 2006

Keywords: Index numbers , Measurement of inflation , Stochastic approach

Rights: Copyright © 2006 International Statistical Institute


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Vol.74 • No. 2 • August 2006
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