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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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File URL: http://www.econrsa.org/node/679
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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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  1. 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.
  2. Barnett, William A. & Serletis, Apostolos, 2008. "Consumer preferences and demand systems," MPRA Paper 8413, University Library of Munich, Germany.
  3. William A. Barnett & Ousmane Seck, 2008. "Rotterdam model versus almost ideal demand system: will the best specification please stand up?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(6), pages 795-824.
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  27. Doran, Howard E. & Rambaldi, Alicia N., 1997. "Applying linear time-varying constraints to econometric models: With an application to demand systems," Journal of Econometrics, Elsevier, vol. 79(1), pages 83-95, July.
  28. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
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