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Time-varying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up?

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  • Barnett, William A.
  • Kalonda-Kanyama, Isaac

Abstract

We use Monte Carlo simulations to assess the ability of the Rotterdam model and the three versions of the almost ideal demand system (AIDS) to recover the time-varying elasticities of a true demand system and to satisfy theoretical regularity. We find that the Rotterdam model performs better at recovering the signs of all the time-varying elasticities. More importantly, the RM has the ability to track the paths of time-varying income elasticities, even when the true values are very high. The linear-approximate AIDS, not only performs poorly at recovering the time-varying elasticities but also badly approximates the nonlinear AIDS.

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File URL: http://mpra.ub.uni-muenchen.de/36513/
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File URL: http://mpra.ub.uni-muenchen.de/36608/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36513.

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Date of creation: 07 Feb 2012
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Handle: RePEc:pra:mprapa:36513

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Keywords: almost ideal demand system; Rotterdam model; structural time series models; Monte Carlo experiment; theoretical regularity;

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