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

  • Barnett, William A.
  • Kalonda-Kanyama, Isaac

We use Monte Carlo simulations to assess the ability of the Rotterdam model and the 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. We find that the Rotterdam model performs better 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://mpra.ub.uni-muenchen.de/36608/3/MPRA_paper_36608.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36513.

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Date of creation: 07 Feb 2012
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Handle: RePEc:pra:mprapa:36513
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  2. Thomas Doan, . "State Space Methods in RATS," Journal of Statistical Software, American Statistical Association, vol. 41(i09).
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  25. Alston, Julian M & Foster, Kenneth A & Green, Richard D, 1994. "Estimating Elasticities with the Linear Approximate Almost Ideal Demand System: Some Monte Carlo Results," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 351-56, May.
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