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Testing for Homogeneity in Demand Systems when the Regressors Are Non-Stationary

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  • Ng, S.

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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Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 9516.

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Length: 23 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:mtl:montec:9516

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Keywords: UNIT ROOTS; ECONOMETRICS;

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