ANTHOLOGY
Robust Estimation of Multiperiod Price
and Quantity Indices
ERIC B L A N K M E Y E R
S o u t h w e s t T e x a s State University
When the prices and quantities of K commodi-
ties are observed over T periods, Blankmeyer
[AEJ, June 1990, pp. 17-26] proposes to estimate
price and quantity indices by a two-way analysis
of variance (ANOVA):
Vrt=Z+pr+qt+ert r , t = l . . . . . T,
where vrt is the logarithm of the aggregate value
of period t quantities evaluated at period r prices.
The constant z is the overall mean of these data.
Interest centers on estimating the log-linear con-
trastspr -Pt and qr - qt, which measure the percent
change in the price and quantity levels, respec-
tively, between periods r and t. The unobservable
disturbance e~t is assumed to be a spherical nor-
mal random variable. It accounts for the fact that
the K prices do not move in lockstep from period
to period; likewise, changes in the Kquantities are
only approximately equiproportional. On these
assumptions, the log-linear contrasts are best linear
unbiased and have maximum likelihood proper-
ties.
However, if the data Vrt are contaminated by
outliers, these least-squares estimates are unduly
susceptible to sampling variation and may be
quite unstable. When the distribution of the dis-
turbances e~ is believed to be very diffuse, a
robust estimation procedure is needed. Bassett
and Koenker [Journal o f the American Statistical
Association, September 1978, pp. 618-22] dem-
onstrate the large-sample superiority of least-
lines regression, which minimizes the total ab-
solute error ZZlertl instead of the total squared
error. Least lines is related to least squares, as a
median is related to a mean. Since it is a multi-
variate version of a median, least lines is relatively
unaffected by stray observations.
Arthanari and Dodge [Mathematical Pro-
gramming in Statistics, Wiley, 1981, ch. 6] note
(1) that least-lines estimation for the ANOVA model
is formally identical to the capacitated transporta-
tion problem, a powerful algorithm of operations
research. In the context of estimating multiperiod
index numbers, the transportation problem may
be characterized as follows: T sources, each en-
dowed with T units; supply T destinations, each
demanding T units. The capacity on each arc is 2
units, the value of a unit shipped along arc r - t is
vrt, and the total value of shipments is to be
maximized. In the optimal solution, the least-
lines estimate o f p r -Pt is simply the difference
between the dual variables for sources r and t, while
qr - qt is estimated by the difference between the
dual variables for destinations r and t. Uniqueness
of the solution can be guaranteed by a virtual
perturbation [Gass, L i n e a r P r o g r a m m i n g ,
McGraw-Hill, 1969, ch. 10].
In summary, the transportation algorithm is a
practical way to screen multiperiod index numbers
for outliers. The availability of this efficient
procedure is fortunate since the data matrix could
be much larger than is usual in ANOVA prob-
lems. For example, if price and quantity indices
are required for quarterly data over 25 years, then
T = 100 and there are 72 = 10,000 observations Vrt.
69