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Time-Varying Parameters in the Almost Ideal Demand System and the Rotterdam Model: Will the Best Specication Please Stand Up?

  • William Barnett

    (Department of Economics, The University of Kansas)

  • Isaac Kalonda-Kanyama

    (Department of Economics, The University of Kansas)

This paper assesses the ability of the Rotterdam model 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 Rotterdam model performs better than the linear-approximate AIDs at recovering the signs of all the time-varying elasticities. More importantly, the Rotterdam model 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://www2.ku.edu/~kuwpaper/2009Papers/201201.pdf
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Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 201201.

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Length: 32 pages
Date of creation: Feb 2012
Date of revision: Feb 2012
Handle: RePEc:kan:wpaper:201201
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  20. Barnett, William A, 1977. "Recursive Subaggregation and a Generalized Hypocycloidal Demand Model," Econometrica, Econometric Society, vol. 45(5), pages 1117-36, July.
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  25. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
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  28. Alston, Julian M. & Chalfant, James A., 1991. "Can We Take The Con Out Of Meat Demand Studies?," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(01), July.
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