who have no need for the improved computing power nevertheless may feel compelled to purchase the new technology because they need to remain compatible with the bulk of users who are at the frontier. even if our techniques allow us to accurately measure consumers ’ valuation of the increased speed and power of the new generation of computer, we may miss the negative influence on some consumers of this incompatibility. therefore, even in the case of personal computers, where we have made such great strides in measuring quality changes, i suspect that important phenomena still may not be adequately captured by our published price indexes. despite the advances in price measurement that have been made over the years, there remains considerable room for improvement. in the united states, a group of experts empanelled by the senate finance committee - - the boskin commission - - concluded that the consumer price index has overstated changes in the cost of living by roughly one percentage point per annum in recent years. about half of this bias owed to inadequate adjustment for quality improvement and the introduction of new goods, and about half reflected the manner in which the individual prices were aggregated. researchers at the federal reserve and elsewhere have come up with similar figures. although the estimates of bias owing to inadequate adjustment for quality improvements surely are the most uncertain aspect of this calculation, the preponderance of evidence is that, on average, such a bias in quality adjustment does exist. the boskin commission, along with most other estimates of bias in the u. s. cpi, have taken a micro - statistical approach, estimating separately the magnitude of each category of potential bias. recent work by staff economists at the federal reserve board has added corroborating evidence of price mis - measurement, using a macroeconomic approach that is essentially independent of the - 5micro - statistical exercises. specifically, employing disaggregated data from the national income and product accounts, this research finds that the measured growth of real output and productivity in the service sector is implausibly weak, given that the return to owners of businesses in that sector apparently has been well - maintained. indeed, the published data indicate that the level of output per hour in a number of service - producing industries has been falling for more than two decades. it is simply not credible that firms in these industries have been becoming less and less efficient for more than twenty years. much more reasonable is the view that prices have been mis - measured and that the true quality - adjusted prices have been rising more slowly than the

mr. greenspan ’ s remarks at the center for financial studies in frankfurt remarks by the chairman of the board of the us federal reserve system, mr. alan greenspan, at the center for financial studies in frankfurt - am - main, on 7 / 11 / 97. the remarkable progress that has been made by virtually all of the major industrial countries in achieving low rates of inflation in recent years has brought into sharper focus the issue of price measurement. as we move closer to price stability, the necessity of measuring prices accurately has become an especial challenge. biases of a few tenths in annual inflation rates do not matter when inflation is high. they do matter when, as now, a debate has emerged over whether our economies are moving toward price deflation. in today ’ s advanced economies, allocative decisions are primarily made not by governments but by markets, and the central guide to the efficient allocation of resources in a market economy is prices. prices are the signals through which tastes and technology affect the decisions of consumers and producers, directing resources toward their highest valued use. of course, this signaling process would work with or without government statistical agencies that measure individual and aggregate price levels, and in this sense, price measurement probably is not fundamental for the overall efficiency of the market economy. indeed, vibrant market economies existed long before government agencies were established to measure prices. nonetheless, in a modern monetary economy, accurate price measurement is of considerable importance, increasingly so for central banks whose mandate is to maintain financial stability. accurate price measures are necessary for understanding economic developments, not only involving inflation but also involving real output and productivity. if the general price level is estimated to be rising more rapidly than is in fact the case, then we are simultaneously understating growth in real output and productivity. real incomes and living standards are rising faster than our published data suggest. under these circumstances, policymakers must be cognizant of the shortcomings of our published price indexes to avoid misguided actions that will provoke unintended consequences. clearly, central bankers need to be conscious of the problems of price measurement as we gauge policies designed to promote price stability and maximum sustainable economic growth. moreover, many economic transactions, both private and public, are explicitly tied to movements in some published price index, most commonly a consumer price index ; and some transactions that are not explicitly tied to a published price index may nevertheless take such an index into account less formally. if the price index is not accurately