Generalizing the Stochastic Approach to Price Indexes

Abstract

I show that conventional price index formulas and time‐dummy hedonic regression techniques all consistently estimate growth parameters in the same generalized model of product pricing. I then use that result to make two points. First, the “stochastic approach” is not a helpful tool for choosing price index formulas, because in its complete form it can justify any of them. Second, the literature uses flawed arguments for replacing time‐dummy hedonic regression with hedonic imputation. The time‐dummy method is an excellent, underrated option.