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Testing for Homogeneity in Demand Systems When the Regressors Are Nonstationary

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Ng, Serena

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Abstract

An implication of optimizing theory is that demand functions are homogeneous of degree zero in prices and nominal income. Evidence based on estimations of demand systems has repeatedly found this restriction to be rejected by the data. However, the hypothesis is often formulated in terms of regressors that are non-stationary. This paper reexamines the evidence for homogeneity in light of recent developments in time-series econometrics with special emphasis on the treatment of trends. We find the demand system to be stochastically but not deterministically cointegrated. Using techniques developed for estimating cointegrating vectors in the presence of deterministic trends, we re-estimate the demand system and find that homogeneity holds in many cases. Copyright 1995 by John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 10 (1995)
Issue (Month): 2 (April-June)
Pages: 147-63
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Handle: RePEc:jae:japmet:v:10:y:1995:i:2:p:147-63

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  2. Nzuma, Jonathan & Sarker, Rakhal, 2008. "An Error Corrected Almost Ideal Demand System for Major Cereals in Kenya," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6443, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  3. Philippe J. Deschamps, 2003. "Time-varying intercepts and equilibrium analysis: an extension of the dynamic almost ideal demand model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(2), pages 209-236. [Downloadable!]
  4. Fofana, Abdulai & Jaffray, Shabbar, 2006. "Measuring Market Power in the UK Retail Salmon Industry," Working Papers 45873, Scottish Agricultural College, Land Economy Research Group. [Downloadable!]
  5. Raymond Y.C. Tse, Sivaguru Ganesan, 1997. "Causal relationship between construction flows and GDP: evidence from Hong Kong," Construction Management & Economics, Taylor and Francis Journals, vol. 15(4), pages 371-376, July. [Downloadable!] (restricted)
  6. Arthur Lewbel & Serena Ng, 2000. "Demand Systems With Nonstationary Prices," Boston College Working Papers in Economics 441, Boston College Department of Economics, revised 07 Jun 2002. [Downloadable!]
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  7. Sulgham, Anil K. & Zapata, Hector O., 2006. "A Dynamic Approach to Estimate Theoretically Consistent US Meat Demand System," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35441, Southern Agricultural Economics Association. [Downloadable!]
  8. Pesaran, M.H. & Ruge-Murcia, F.J., 1995. "A Discrete-Time Version of Target Zone Models with Jumps," Cahiers de recherche 9530, Universite de Montreal, Departement de sciences economiques. [Downloadable!]
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  9. Luca Pieroni, 2007. "How Strong is the Relationship between Defence Expenditure and Private Consumption? Evidence from the United States," Discussion Papers 0705, University of the West of England, Department of Economics. [Downloadable!]
  10. Sean Collins & Richard G. Anderson, 1997. "Modeling U.S. households' demand for liquid wealth in an era of financial change," Working Papers 1997-014, Federal Reserve Bank of St. Louis. [Downloadable!]
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  11. D. Aristei & Luca Pieroni, 2008. "Cointegration Rank Test and Long Run Specification: A Note on the Robustness of Structural Demand Systems," Discussion Papers 0809, University of the West of England, Department of Economics. [Downloadable!]
  12. Tiffin, Richard & Balcombe, Kelvin, 2003. "Testing Symmetry And Homogeneity In The Aids With Cointegrated Data Using Fully-Modified Estimation And The Bootstrap," 2003 Annual Meeting, August 16-22, 2003, Durban, South Africa 25845, International Association of Agricultural Economists. [Downloadable!]
  13. Barnett, William A. & Serletis, Apostolos, 2008. "Consumer preferences and demand systems," MPRA Paper 8413, University Library of Munich, Germany. [Downloadable!]
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  14. Clifford Attfield, 2004. "A Comparison of the Translog and Almost Ideal Demand Models," Bristol Economics Discussion Papers 04/564, Department of Economics, University of Bristol, UK. [Downloadable!]
  15. Douglas Fisher & Adrian R. Fleissig & Apostolos Serletis, 2001. "An empirical comparison of flexible demand system functional forms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(1), pages 59-80. [Downloadable!]
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  16. Chang, Hui-Shung Christie, 2000. "An econometric analysis of the competitive position of Australian cotton in the Japanese market," Working Papers 12940, University of New England, School of Economics. [Downloadable!]
  17. Holt, Matthew T. & Goodwin, Barry K., 2009. "The Almost Ideal and Translog Demand Systems," MPRA Paper 15092, University Library of Munich, Germany. [Downloadable!]
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  19. Vittorio Nicolardi, 2009. "The effects of the new 1995 ESA methodologies of estimation on the structural analysis of Italian consumption," Statistical Methods and Applications, Springer, vol. 18(1), pages 125-149, March. [Downloadable!] (restricted)
  20. Clifford Attfield, 2004. "Stochastic Trends, Demographics and Demand Systems," Bristol Economics Discussion Papers 04/563, Department of Economics, University of Bristol, UK. [Downloadable!]
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