The response of the official statistics
As already mentioned, the Federal Statistical Office had already started revising their methods for quality adjustment and improving the training of the price collectors in 1997/1998. More radical changes in the price statistics needed time and additional (academic) staff. While the technical staff for the price statistics is of excellent quality and highly motivated, the introduc-tion of more advanced methods of quality adjustments called for different skills.
At the request of the Federal Statistical Office, the Bundesbank co-sponsored an inter-national conference on quality adjustment methods (“Hedonic Methods in Price Statistics”), which was held in Wiesbaden in June 2001. Main contributors to this conference, which was chaired by Hans-Wolfgang Brachinger, were Erwin Diewert, Mick Silver, Jack Triplett and a number of practising statisticians from statistical agencies with some experience in hedonic methods. The purpose of this conference was to convince a sceptical audience that hedonics is a superior and feasible method of performing quality-adjustments, and to signal to the Federal Government the commitment of the Federal Statistical Office in tackling the quality adjustment problem with high priority.
It was at about this time that a research group with additional staff became established within the Price Statistics Division of the Federal Statistical Office. Its main task was research and development in the field of hedonics, although it was also concerned with other problems of price statistics. This group – consisting of economists and statisticians – is now well estab-lished and has since developed hedonic indices for PCs, other IT hardware, used cars, washing machines, TV sets and new dwellings. It also makes an active contribution to the discussion at the international level, most notably to the working of the Ottawa Group.
Later on, the Federal Government further stepped up the pressure on the Federal Statistical Office to speed up the introduction of hedonic indices for IT products, and the Federal Government asked the Bundesbank to give help to the Federal Statistical Office. In the end, it was decided that an economist from the Bundesbank should join the price statistics group of the Federal Statistical Agency for six weeks and write a feasibility report on hedonics in export, import and producer price statistics.
The main conclusions of this report (Hoffmann, 2002), which was very detailed with respect to the most important IT hardware components, were that it could be done, but that it would be hard going. The report, which was never published, also contained some exemplary hedonic esti-mates. Furthermore, the report proposed an integrated systems approach to the quality adjust-ment of hardware and software, which the German Federal Statistical Office now seems to be considering. With respect to the application of the hedonic methods, the report proposed a mod-est approach along the lines of the BLS practices. After some reflection, the Federal Statistical Office opted for a far more radical approach and, for IT hardware, abandoned the traditional col-lection of prices at the factory gate and at the border. Instead, the hedonic indices are derived from wholesale price data, partly gathered at the euro-area level.
The Federal Statistical Office released the hedonic price index for PCs in October 2002 (see Linz and Eckert 2002). The hedonically adjusted price indices for an impressive list of IT investment goods and components (desktop computers, notebooks, servers, inkjet printers, laser printers, multi-purpose printers, processors, memory chips, hard disks) followed in June 2004 (see Linz et al. 2004). With the release of the chain-linked national accounts in 2005, the defla-tors for expenditures on IT goods were revised backwards to 1991.
Residential property price indices
The Bundesbank residential property price index was originally compiled for monetary policy considerations only and was kept confidential. It had been developed by the General Economic, Capital Markets and Financial Statements Statistics Division of the Bundesbank, based on data of the BulwienGesa AG. The price data which feed into this index are not actual transaction data, but prices estimated by local property experts. In the years following the new economy bubble, a number of reports were published which gave the mistaken impression of a dramatic fall in residential property prices in Germany. After some reflection, the Bundesbank decided to publish the property price index, which did not show such a pronounced decline. The first data were released in spring 2004, and in September 2004 a special chapter of the Monthly Report (“Price indicators for the housing market”) was devoted to the theoretical and practical problems of housing price indicators. It was also quite transparent with respect to the weaknesses of the Bundesbank/BulwienGesa indicator. Later on, the new residential property price index was presented at numerous conferences and workshops. Today, we can say, that the Bundesbank
PROCEEDINGS IFC WORKSHOP – SESSION 8
property price indicator is the market-leader in Germany. Still, we are quite well aware of the deficiencies of this indicator, and the Bundesbank appreciates very much the efforts of the Federal Statistical Office in the development of a more satisfying, reliable house price indicator based on actual transaction data.
Present matters
The focus of recent work of Bundesbank (statistics and economics) staff has been on the ade-quate coverage of owner-occupied housing in the HICP (see Leifer 2001, 2006) and on methods for coping with the increasing impact of end-of-season sales on the price indices for apparel.
Furthermore, the statistics staff at the Bundesbank are trying to improve the seasonal adjustment of price indices by introducing working-day adjustments (Deutsche Bundesbank 2004). And finally, we continue to review quality adjustment procedures critically, and the Bundesbank con-tributes to the work of CENEX, which is an initiative for improving the quality of price statis-tics in the euro area.
Conclusions
I think that there are clear indications that the involvement of the Bundesbank in the measure-ment debate has speeded things up with respect to the improvemeasure-ment of price statistics. Most importantly, it has led to a significant increase in the number of academic staff in the federal price statistics and to the establishment of a price index research centre at the Federal Statistical Office. Nowadays, Germany is the country with the most advanced hedonics program in the euro area. Still, the management of the Federal Statistical Office sometimes seems to fear that a public debate about price statistics could undermine the credibility of the official statistics.
Therefore, they prefer close and confidential cooperation, which is typical of day-to-day busi-ness. But without a public debate it is sometimes not possible to achieve the shift in resources necessary for more radical improvements in price statistics.
References
Deutsche Bundesbank (1968), “The extent of depreciation of money since 1950, and the prospective trend of the value of money, Report prepared by the Deutsche Bundesbank on 21 July 1965 at the request of the Federal Finance Court”, Monthly Report, March, pp 3–19.
Deutsche Bundesbank (1998), “Problems of inflation measurement”, Monthly Report, May, pp 51–64.
Deutsche Bundesbank (1999), “Zur Diskussion über den Verbraucherpreisindex als Inflationsindikator”, Volkswirtschaftliche Forschungsgruppe der Deutschen Bundesbank Diskussionspapier 3/99.
Deutsche Bundesbank (2000), “Problems of international comparisons of growth caused by dissimilar methods of deflation with IT equipment in Germany and the United States as a case in point”, Monthly Report, August, p 8.
Deutsche Bundesbank (2001), “Problems of international comparisons of growth – a supplementary analy-sis”, Monthly Report, May, pp 39–43.
Deutsche Bundesbank (2002), “Changes in the official consumer price statistics and their implications for the ‘measurement bias’ in the inflation rate”, Monthly Report, August, pp 38–39.
Deutsche Bundesbank (2003), “Price indicators for the housing market”, Monthly Report, September, pp 45–58.
Deutsche Bundesbank (2004), “Working-day adjustments to consumer prices since April 2004”, Monthly Report, May, p 62.
Hoffmann J (1998), “Problems of inflation measurement in Germany”, Economic Research Group of the Deutsche Bundesbank Discussion Paper 1/98.
Hoffmann J (1999a), “The treatment of quality changes in the German Consumer Price Index”, in:
JOHANNES HOFFMANN
Hoffmann J (2002), “Studie zur Vorbereitung der Einführung hedonischer Indizes für EDV-Güter in Ausfuhr-, Einfuhr- und Erzeugerpreisindizes”, Deutsche Bundesbank mimeo.
Hoffmann J, C Kurz (2002), “Rent Indices for Housing in West Germany”, Economic Research Centre of the Deutsche Bundesbank Discussion Paper 01/02 (also published as Working Paper No. 116 in the Working Paper Series of the European Central Bank).
Kurz C, J Hoffmann (2004), “A Rental-equivalence index for owner-occupied housing in West Germany, 1985 to 1998”, Economic Research Centre of the Deutsche Bundesbank Discussion Paper 31/2004.
Leifer, H A (2001), “Zur Behandlung dauerhafter Güter in einem Verbraucherpreisindex und in einem Lebenshaltungskostenindex”, in: Allgemeines Statistisches Archiv 85, pp 301–308.
Leifer, H A (2006), “The inclusion of owner-occupied housing in a consumer price index: some simple considerations”, Deutsche Bundesbank mimeo.
Linz S, T Behrmann, U Becker (2004), “Hedonic price measurements for IT products”, Statistisches Bundesamt.
Linz S, G Eckert (2002), “Introducing hedonic methods in price statistics”, Statistisches Bundesamt mimeo.
Johannes Hoffmann (Deutsche Bundesbank)
PROCEEDINGS IFC WORKSHOP – SESSION 8
Summary of discussion
With very few exceptions, national statistical institutes compile CPI, a key statistic for central banks in their conduct of monetary policy operations. As key stakeholders, central banks need to be involved in methodological as well as practical compilation issues concerning the CPI. The focus of this session was to discuss the ways in which the cooperation between central banks and the compilers of inflation statistics is organised and the types of institutional arrangements that may be set up to ensure good co-operation between the institutions involved.
In this context, two major points were made to initiate the discussion. Central banks cannot ignore the statistical issues and methodological questions relating to the measurement of infla-tion. CPI is a primary statistic in this regard and the central banks would like appropriate institutional arrangements and agreements to ensure such involvement. However, such arrange-ments remain equally valid for any other data that is of interest to a central bank.
Central banks should not be in charge of the compilation of inflation measures. Indeed, they may face serious communication problems if they are also responsible of the compilation of an indicator, which is a target of their monetary policy.
Central banks are often both users and producers of economic and financial statistics. In the case of the CPI, central banks are usually not the compilers. For example, in Europe, the method-ology of the HICP is not determined by the ECB but by the European Commission, which runs the statistical office, Eurostat. The ECB is only requested to issue an opinion on the metho-dology of the HICP.
In order to ensure good communication between the ECB and Eurostat, some institutional arrangements are required so that Eurostat is aware of and takes into account the statistical requirements of the ECB. Very often, such issues can be resolved by expert level interaction and goodwill. However, it is also useful to have some institutional arrangements in place. For instance, at different levels of EU, there are regular meetings: a EU commissioner is invited to the Governing Council meeting of the ECB, and there is a forum to bring together the managers of the statistics departments of the 25 EU central banks and the representatives from the corres-ponding national statistical agencies: the Committee on Financial, Monetary and Balance of payments statistics (CFMB).
Similar arrangements can be found in other countries as well. In Indonesia, the central bank is involved in developing the methodology of CPI compilation (design of surveys, definition of the CPI weights) as well as in direct price collection. Central banks also typically support the statistical agency financially and logistically. In some cases, there are formal memorandums of understanding drawn up to ensure that the new data is publicly available. In some cases, as in India, there are formal mechanisms to ensure effective cooperation. For instance, whenever a new statistical event takes place, (large statistical surveys, and change of base) a technical advi-sory group consisting of government and central bank officials as well as academics is set up to evaluate and recommend changes to the compiling agency. As these suggestions are fully imple-mented by the statistical agencies, the procedure guarantees a high level of consensus.
In the case of the CPI manual produced by the IMF, the role of the central banks is very sig-nificant. There were many examples of central bankers who have been very influential in the CPI Manual discussions. The IMF is interested in the expertise provided by the central bank community and is ready to invite, in its working groups, central banks which are currently work-ing on CPI methodology.
The fact that the central bank is in charge of the compilation of the CPI in Mexico is not questioned very much. This situation has lasted for 80 years and is now enforced by law.
However, the parliament might very soon make changes to the law so that the task of CPI com-pilation is handed over to the statistical agency. If this happens, a working group will be set up to ensure that the quality remains the same as before. The Statistical Institute has a good reputation in Argentina and during the hyperinflation period, the quality of the CPI data was never questioned. The relationship between this institute and the central bank is very good but informal.
a lack of incentive for the national agencies to move forward and the Eurostat cannot direct the national statistical agencies to change their methodologies. Several formal agreements for coop-eration have been implemented between the central bank and the statistical agency in the Netherlands but they cover areas other than the CPI. Indeed the central bank is only one of the numerous users of inflation statistics. Consequently, the statistical institute has no reason to sign a formal agreement with the central bank in the CPI area.
In the US, a formal Advisory Council including the BEA, BLS and the Federal Reserve exists but its functioning is very academic. As the Federal Reserve is a major consumer of data, its staff regularly meet and exchange information with representatives of all statistical boadies.