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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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  • William A. Barnett
  • Isaac Kalonda Kanyama

Abstract

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.

Suggested Citation

  • William A. Barnett & Isaac Kalonda Kanyama, 2013. "Time-varying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up?," Applied Economics, Taylor & Francis Journals, vol. 45(29), pages 4169-4183, October.
    • Handle: RePEc:taf:applec:v:45:y:2013:i:29:p:4169-4183
    DOI: 10.1080/00036846.2013.768014
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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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