Accounting for Trends in the Almost Ideal Demand System

Serena Ng

No 368, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Flexible functional forms of indirect utility and expenditure functions are frequently used in approximating the behavior of utility maximizing consumers to arrive at demand systems that can be easily estimated. A common finding in time series estimations of the Almost Ideal Demand System is strong persistence in the estimated residuals. This paper suggests two explanations for this result. First, the functions used to approximate total expenditure does not allow for the possibility of economic growth. Hence when the data on expenditure have trends, the inadequacy of the approximation results in residuals that are serially correlated. Second, when the economy grows and/or prices trend at different rates, Stone's price index provides a poor approximation to the theoretically appropriate price variable. The consequence is also reflected in the error term. Simulations are used to illustrate these arguments and cointegration is proposed as a guide to model specification.

Keywords: demand systems; trends; nonstationarity; Stone's price index (search for similar items in EconPapers)
JEL-codes: C33 C43 D11 (search for similar items in EconPapers)
Pages: 14 pages
Date: 1997-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://fmwww.bc.edu/EC-P/wp368.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:368

Access Statistics for this paper

More papers in Boston College Working Papers in Economics from Boston College Department of Economics Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F Baum (baum@bc.edu).