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

William Barnett and Isaac Kanyama

No 201201, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: 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.

Keywords: AIDS; Rotterdam model; structural time series models; Monte Carlo experiment; theoretical regularity. (search for similar items in EconPapers)
JEL-codes: C51 C52 D12 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2012-02, Revised 2012-02
New Economics Papers: this item is included in nep-cmp
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Related works:
Journal Article: Time-varying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up? (2013)
Working Paper: Time-varying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up? (2012)
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