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Estimation of income elasticities and their use in a CGE model in Palestine

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  • de Boer, P.M.C.
  • Missaglia, M.

Abstract

A popular functional form for modeling the consumption block of a computable general equilibrium model (CGE) is the Linear Expenditure System (LES) for which the Engel curves are straight lines. The LES does not allow for the existence of inferior commodities, elastic demand and for gross substitution. To calibrate the parameters outside information on income elasticities and on the expenditure elasticity of the marginal utility of expenditure (Frisch parameter) is needed. In this paper we propose to use the Indirect Addilog System (IAS) that allows for non-straight Engel curves, inferior commodities, elastic demand and gross substitution, and for which the outside data requirement is the same as for LES. In the empirical part we estimate the income elasticities of the IAS from the 1998 Palestinian Expenditure and Consumption Survey (PECS). We replace the LES consumption block with a priori fixed income elasticities of the CGE model, that we previously constructed for Palestine based on the 1998 Social Accounting Matrix (SAM), by the IAS with estimated income elasticities and perform a sensitivity analysis for the choice of the Frisch parameter. A comparison with the results obtained by the LES-model with the same income elasticities makes it possible to further clarify the importance of using a IAS to represent consumption behaviors.

Suggested Citation

  • de Boer, P.M.C. & Missaglia, M., 2006. "Estimation of income elasticities and their use in a CGE model in Palestine," Econometric Institute Research Papers EI 2006-12, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    • Handle: RePEc:ems:eureir:7753
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    References listed on IDEAS

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    1. Marco Missaglia & Paul de Boer, 2004. "Food-For-Work versus Cash-For-Work: Emergency Assistance in Palestine," Economic Systems Research, Taylor & Francis Journals, vol. 16(4), pages 367-390.
    2. Heij, Christiaan & de Boer, Paul & Franses, Philip Hans & Kloek, Teun & van Dijk, Herman K., 2004. "Econometric Methods with Applications in Business and Economics," OUP Catalogue, Oxford University Press, number 9780199268016.
    3. Somermeyer, W. H. & Langhout, A., 1972. "Shapes of Engel curves and demand curves: Implications of the expenditure allocation model, applied to Dutch data," European Economic Review, Elsevier, vol. 3(3), pages 351-386, November.
    4. Paul de Boer & Bjarne S. Jensen, 2005. "The Expenditure System of CDES Indirect Utility Functions," DEGIT Conference Papers c010_036, DEGIT, Dynamics, Economic Growth, and International Trade.
    5. de Boer, P.M.C. & Missaglia, M., 2005. "Introducing the indirect addilog system in a computable general equilibrium model: a case study for Palestine," Econometric Institute Research Papers EI 2005-25, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    6. Paul De Boer, 1997. "On the Relationship between Input-Output Coefficients and Hanoch's Linear Homogeneous Constant Differences of Elasticities of Substitution Production Function," Economic Systems Research, Taylor & Francis Journals, vol. 9(3), pages 259-264.
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    3. Yalew, Amsalu W. & Hirte, Georg & Lotze-Campen, Hermann & Tscharaktschiew, Stefan, 2017. "Economic effects of climate change in developing countries: Economy-wide and regional analysis for Ethiopia," CEPIE Working Papers 10/17, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    4. Amsalu Woldie Yalew & Georg Hirte & Hermann Lotze-Campen & Stefan Tscharaktschiew, 2018. "Climate Change, Agriculture, and Economic Development in Ethiopia," Sustainability, MDPI, vol. 10(10), pages 1-23, September.

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