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Rotterdam vs Almost Ideal Models: Will the Best Demand Specification Please Stand Up?

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  • William Barnett

    (Department of Economics, The University of Kansas)

  • Ousmane Seck

    (Department of Economics, The University of Kansas)

Abstract

Among the many demand specifications in the literature, the Rotterdam model and the Almost Ideal Demand System (AIDS) have particularly long histories, have been highly developed, and are often applied in consumer demand systems modeling. Using Monte Carlo techniques, we seek to determine which model performs better in terms of its ability to recover the true elasticities of demand. We derive the correct formulae for the AIDS models elasticities, when the T°ßornqvist or two modified versions of the Stone index are used to linearize the model. The resulting linearized AIDS are compared to the full AIDS.

Suggested Citation

  • William Barnett & Ousmane Seck, 2006. "Rotterdam vs Almost Ideal Models: Will the Best Demand Specification Please Stand Up?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200605, University of Kansas, Department of Economics.
    • Handle: RePEc:kan:wpaper:200605
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    More about this item

    Keywords

    Rotterdam Model; Almost Ideal Model; consumer demand system; Monte Carlo study; flexible functional forms;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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