perfectly specified hedonic adjustment. But hedonics equations cannot be perfectly specified, and BLS research indicates that, in practice, the adjustments fall on both sides of the class-mean imputation. We look at some of these research results next.

The Recent BLS Hedonics Initiative

BLS’s hedonics studies are designed to produce equations that can be used to adjust noncomparable replacement item price quotes. Several of the studies compare the performance of a hedonically adjusted index against one simulated with the same methods as the published index. In as many cases as not, the hedonically adjusted price index increases at a faster rate than does the published (class-mean based) version. In other words, the hedonic quality change price adjustment is often smaller than the conventionally used implicit quality adjustment. For instance, for the period June 1999 through December 1999, substitute VCR price quotes used in the published index decreased on average by 4.3 percent (or, annualized, by 7.4 percent). For the same 7-month period, the hedonically adjusted price for substitute quotes decreased by an annualized 2.2 percent (Thompson, 2000:6). This translates into 13.2 and 11.5 percent annualized decreases, respectively, for the published versus hedonically adjusted indexes for the other video equipment strata, of which VCRs are one subcategory. The study of VCRs by Liegey et al. (1999) showed similar results using 1997 data: hedonically adjusted price quote substitutions also grew less rapidly than the published indexes for refrigerators and audio equipment.

In contrast, some of the experimental hedonics applications have slowed index growth by more than the implicit adjustment methods. The TV index falls more rapidly with hedonic adjustment. Moulton et al. (1998) produced a hedonically adjusted index (of the type that has been adopted for other items in the CPI) for the period 1993-1997 that grew 1.4 percent less than the actual CPI for televisions that used the linking methods (p. 11). Table 4.2 summarizes the effects on the CPI from a selection of recent hedonic applications.

For many CPI items, the number of substitute quotes that are available to quality adjust is not large enough for the hedonic adjustment to seriously affect the strata index, much less the overall index. Moulton et al. (1998) note that confining hedonic adjustments to cases of noncomparable substitutions for anything other than very high turnover products like computers will not produce many significant effects on the CPI component indexes.

Another factor that may affect index growth is the frequency with which items are deemed noncomparable and, hence, eligible for hedonic or class-mean adjustment. In each of the BLS studies, the breakdown of substitute items into comparable and noncomparable categories changed with adjustment mode. For instance, in the microwave oven study, moving to hedonics resulted in an increase in the number of noncomparable substitutes increasing from 5 (of 39



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