EXPENDITURE PATTERNS, HETEROGENEITY AND LONG-TERM STRUCTURAL CHANGE

Kenneth Clements, Marc Jim M. Mariano and George Verikios
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Marc Jim M. Mariano: KPMG Economics

No 21-10, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

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.

Keywords: Consumer behaviour; heterogeneity; linear expenditure system; Engel curves; CGE models; structural change (search for similar items in EconPapers)
JEL-codes: C31 C68 D12 (search for similar items in EconPapers)
Pages: 47
Date: 2021
New Economics Papers: this item is included in nep-cmp and nep-ore
Note: MD5 = 0f20a89ad1dab9bec1c62da29bb7140f
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Journal Article: Expenditure patterns, heterogeneity, and long-term structural change (2022)
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