ISSUES WITH A CHAINED-TYPE PRICE INDEX: AN ANALYSIS WITH THE PRODUCER PRICE INDEX

Abstract

Regarding the recent switch from the fixed base price index to the chained-type price index in many countries, we examine important issues including the selection of the weight to produce more accurate chained-type price indices and to maintain statistical consistency in the time series of a price index in this study. We determine that the actual weight from year t-3 data better produces a more correct chained-type producer price index at t between two available methods of selecting the weights. This weighting method also provides generally better statistical consistency and stability for the chained-type producer price index. We also compare the MAE and RMSE of the price equations of the fixed base and chain indices. Both the unit root test and comparison of the model performance evaluation reveal no critical difference, thus confirming a stability over the two indices. In particular, the substitutability of the chain index for the fixed base index is highly obtained, regardless of the time horizon. Overall, we can confidently assert that the chain index provides a statistical consistency and stability over a fixed base index.