Instability of the Hedonic Model and Its Effect on the Quality Adjustment of Price Indices – The case of desktop personal computers –∗ Preliminary Draft

This paper examines the instability of the hedonic model for desktop personal computers over time and its influence on the quality adjustment of price indices. While previous research has mainly focused on the insta-bility of the hedonic model considering the variety of the functional forms, this paper simulates the quality adjustment using a virtual dataset for price replacements. The results show that the accuracy of quality adjustment de-pends on the time-lag between the time of model estimation and that of model application to actual price replacements, and that the selection of the functional form should be based not only on the in-sample fit for estimat-ing the hedonic model, but also on the increase in error derived from the time-lag. ∗The author would like to thank the following individuals for their assistance during the prepa