Age Effects, Unobserved Characteristics and Hedonic Price Indexes: The Spanish Car Market in the 1990's

Xosé-Luís Varela-Irimia

doi:10.2139/ssrn.1909192

Abstract

This paper computes and compares alternative quality-adjusted price indexes for new cars in Spain in the period 1990-2000. The proposed hedonic approach simultaneously controls for time-invariant unobserved product effects and time-variant unobserved quality changes, that are assumed to be captured by model age effects. The results show that the non-adjusted price index largely overstates the increase in the cost of living induced by changes in car prices and that previous evidence for this market have not measured the real extent of that bias, probably due to the omission of controls for unobservables. It is also shown that omitting age effects can also lead to misleading conclusions. The estimated price indexes give also some insights on what could have been the determinants of price evolution in the Spanish car market.

Highlights

The consumer price index (CPI) is an economic measure of major interest in economic policy
The estimated coefficients have in general the right sign, a few variables show reversed signs for certain periods, a fact frequently reported in the literature (Pakes 2003)
19 It must be said, that smoothing does not have any significant impact over the hedonic price indexes, because the results were essentially identical for orders of smoothing of 3, 7, 13 and 1

Summary

Introduction

The consumer price index (CPI) is an economic measure of major interest in economic policy. The CPI is the basis for measuring growth and productivity in real terms, notwithstanding its influence in the evolution of interest rates and other financial variables governing, for instance, investment decisions at the micro and macro levels, which influence growth rates. In this context, the correct measurement of consumer price changes is a fundamental issue (Boskin et al 1998). They have served to renew the interest on hedonic regressions and hedonic price indexes as a potential way of controlling for those biases

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Results

Conclusion