A Note on the Stochastic Approach to Index Numbers

In a recent article, Clements and Izan (1987) used the stochastic approach to index-number theory to estimate the rate of inflation and its standard error. Selvanathan (1988) extended their approach to the prices of groups of goods and to prices within groups. In this note, I apply the within-group results to the U.K. alcohol data. Simulation results show that the estimates are unbiased, but the asymptotic standard errors understate the true sampling variability of the estimates. To overcome this problem, I applied the bootstrap technique to obtain alternate standard errors.