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

  • William A. Barnett
  • Isaac Kalonda Kanyama

This article assesses the ability of the Rotterdam Model (RM) and of 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. Using Monte Carlo simulations, we find that the RM performs better than the linear-approximate AIDS 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://hdl.handle.net/10.1080/00036846.2013.768014
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 45 (2013)
Issue (Month): 29 (October)
Pages: 4169-4183

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Handle: RePEc:taf:applec:v:45:y:2013:i:29:p:4169-4183
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