Abstract
In January 1996, the Bureau of Economic Analysis switched from fixed-weighted GDP to chain-type GDP as its featured measure of real output, because fixed weights are appropriate only when the relative price structure of the economy does not change over time. This paper shows that the better microeconomic properties of the chain-type measures also help the simulation properties of a macroeconomic forecasting model. In particular, Laspeyres-based models often violate the assumption that marginal revenue equals marginal cost. This can produce unrealistic income and multiplier responses, which are eliminated by using chain-type output.
Get full access to this article
View all access options for this article.