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Time-varying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up?

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  • Barnett, William A.
  • Kalonda-Kanyama, Isaac

Abstract

We use Monte Carlo simulations to assess the ability of the Rotterdam model and the 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. We find that the Rotterdam model performs better at recovering the signs of all the time-varying elasticities. More importantly, the RM 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.

Suggested Citation

  • Barnett, William A. & Kalonda-Kanyama, Isaac, 2012. "Time-varying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up?," MPRA Paper 36513, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:36513
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    More about this item

    Keywords

    almost ideal demand system; Rotterdam model; structural time series models; Monte Carlo experiment; theoretical regularity;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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