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Expenditure Patterns, Heterogeneity And Long-Term Structural Change

Author

Listed:
  • Kenneth W. Clements

    (Business School, The University of Western Australia)

  • Marc Jim M. Mariano

    (KPMG Economics)

  • George Verikios

    (KPMG Economics and Griffith University)

Abstract

The simplicity and parsimony of the linear expenditure system (LES) of consumer demand accounts for its influence and popularity in numerous applications. But the model struggles to deal adequately with heterogeneity mainly because of its linear Engel curves. In this paper we deal with the issue by disaggregating consumers according to their income. Application to a large Australian database reveals (i) noticeable differences in demand responses are masked when the LES is constrained to have the same parameters across the income distribution; and (ii) a substantial improvement in the fit of the disaggregated model. The disaggregated demand system is then embedded in a CGE model to give it microsimulation capabilities. Stochastic simulations of over a 30-year horizon demonstrate the disaggregated approach is a significant channel of long-term structural change.

Suggested Citation

  • Kenneth W. Clements & Marc Jim M. Mariano & George Verikios, 2021. "Expenditure Patterns, Heterogeneity And Long-Term Structural Change," Economics Discussion / Working Papers 21-10, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:21-10
    Note: MD5 = 0f20a89ad1dab9bec1c62da29bb7140f
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    More about this item

    Keywords

    Consumer behaviour; heterogeneity; linear expenditure system; Engel curves; CGE models; structural change;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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