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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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http://www2.ku.edu/~kuwpaper/2009Papers/201201.pdf (application/pdf)

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) Downloads
Working Paper: Time-varying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up? (2012) Downloads
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