Measuring the substitution bias in Japan: the demand system approach and a superlative index

Abstract

This study estimates the demand system using Japanese micro data and calculates the cost of living index (COLI) to assess the substitution bias in the Consumer Price Index. The estimated bias during the sample period of 1982–2000 is about 0.06 percentage points, which is larger than the estimates calculated from a superlative index. The difference between the COLI and a superlative index can be explained with the upward movements of the average utility level in Japan, since the cost of living for the rich has grown more rapidly than that for the poor.