Potential biases in substitution estimates and violations of regularity conditions

Leigh Drake and Adrian R. Fleissig

A chapter in Measurement Error: Consequences, Applications and Solutions, 2009, pp 27-60 from Emerald Group Publishing Limited

Abstract: This chapter examines factors that cause violations of regularity conditions and biases in estimates of substitution. In the context of the Fourier demand system, failing to impose curvature restrictions but correcting for serial correlation results in few violations of the curvature conditions. In contrast, imposing curvature restrictions without correcting for serial correlation biases substitution estimates and can cause violations of monotonicity. For serially correlated data, results suggest that correcting for serial correlation may be more important than imposing curvature. Furthermore, the artificially break-adjusted data that are inconsistent with consumer optimization can severely bias estimates. Results from the Bank of England's (BOE) preferred non-break-adjusted data establish that money and goods are substitutes in demand.

Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-9053(2009)0000024005

DOI: 10.1108/S0731-9053(2009)0000024005

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