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

  • William A. Barnett and Isaac Kalonda-Kanyama

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 nd 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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Paper provided by Economic Research Southern Africa in its series Working Papers with number 335.

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Length: 41 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:rza:wpaper:335
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