Does the Stochastic Specification of the Linear Expenditure System Matter?
When “income” in a system of demand equations is defined as total expenditure, actual expenditure on any commodity must lie between zero and income, or equivalently, budget shares must lie between zero and one. But models for expenditures or shares are often the sum of deterministic components (predicted values), which are functions of prices and income, and disturbances, usually assumed multivariate normal. The predicted values ought to satisfy the same bounds as the dependent variables and will do so if the demand system is “regular”. But even then, the situation is theoretically inconsistent with unbounded disturbances and it has been proposed (Fry et al., 1996) that analysis be appropriately modified. In assessing how much practical difference this makes, the linear expenditure system (LES) is, for reasons described in the paper, the crucial case. We compare estimation methods for the LES, using Irish data from 1979-99 on some broadly defined commodities, and find that the differences are not of practical concern.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gerry Boyle, 1995. "A MAIDS Model of Irish Meat Demand," Economics, Finance and Accounting Department Working Paper Series n570695, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
- Barnett, William A, 1983. "New Indices of Money Supply and the Flexible Laurent Demand System," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(1), pages 7-23, January.
- Fry, Jane M. & Fry, Tim R. L. & McLaren, Keith R., 1996. "The stochastic specification of demand share equations: Restricting budget shares to the unit simplex," Journal of Econometrics, Elsevier, vol. 73(2), pages 377-385, August.
- Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
- Barnett, William A & Lee, Yul W, 1985. "The Global Properties of the Miniflex Laurent, Generalized Leontief, and Translog Flexible Functional Forms," Econometrica, Econometric Society, vol. 53(6), pages 1421-37, November.
- Russel J. Cooper & Keith R. McLaren, 1992. "An Empirically Oriented Demand System with Improved Regularity Properties," Canadian Journal of Economics, Canadian Economics Association, vol. 25(3), pages 652-68, August.
- Chalfant, James A, 1987. "A Globally Flexible, Almost Ideal Demand System," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(2), pages 233-42, April.
When requesting a correction, please mention this item's handle: RePEc:eso:journl:v:34:y:2003:i:1:p:23-32. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Frank Walsh)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.