Barnett, William A. and Seck, Ousmane (2006): Rotterdam vs Almost Ideal Models: Will the Best Demand Specification Please Stand Up?
Download (363Kb) | Preview
Among the many demand specifications in the literature, the Rotterdam model and the Almost Ideal Demand System (AIDS) have particularly long histories, have been highly developed, and are often applied in consumer demand systems modeling. Using Monte Carlo techniques, we seek to determine which model performs better in terms of its ability to recover the true elasticities of demand. We derive the correct formulae for the AIDS models elasticities, when the Törnqvist or two modified versions of the Stone index are used to linearize the model. The resulting linearized AIDS are compared to the full AIDS.
|Item Type:||MPRA Paper|
|Original Title:||Rotterdam vs Almost Ideal Models: Will the Best Demand Specification Please Stand Up?|
|Keywords:||Rotterdam Model; Almost Ideal Model; consumer demand system; Monte Carlo study; flexible functional forms|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables
E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation: Models and Applications
|Depositing User:||William A. Barnett|
|Date Deposited:||12. Oct 2006|
|Last Modified:||13. Feb 2013 09:10|
Allen RGD. 1938. Mathematical analysis for economists. Macmillan: London.
Allen RGD, Hicks JR. 1934. A reconsideration of the theory of value, II. Economica 1(2): 196-219.
Alston JM, Chalfant A. 1993. The silence of the Lamdas: a test for the Almost Ideal and Rotterdam models. American Journal of Agricultural Economics 75: 304-14.
Alston JM, Foster KA, Green R. 1994. Estimating elasticities with the linear approximate ideal demand system: some Monte Carlo results. Review of Economics and Statistics 76:351-56.
Arrow KJ, Chenery HB, Minhas BS, Solow RM. 1961. Capital-labor substitution and economic efficiency. Review of Economics and Statistics 43:225-50.
Banks J, Blundell R, Lewbel A. 1997. Quadratic Engel curves and consumer demand. Review of Economics and Statistics 79:527-39.
Barnett WA. 1979. Theoretical foundations of the Rotterdam model. Review of Economic Studies 46: 109-30.
Barnett WA. 1983. New indices of money supply and the flexible Laurent demand system. Journal of Business and Economic Statistics 1: 7-23.
Barnett WA., Jonas A. 1983. The Muntz-Szatz demand system: an application of a globally well-behaved series expansion. Economic Letters 11(4): 337-42.
Barnett WA. 1985. The Minflex Laurent Translog flexible functional form. Journal of Econometrics 30: 33-44.
Barnett WA., Lee WY. 1985. The global properties of the Minflex Laurent, Generalized Leontief and Translog flexible functional forms. Econometrica 53: 1421-1437.
Barnett WA., Lee WY, Wolfe MD. 1985. The three- dimensional global properties of the Minflex Laurent, Generalized Leontief, and Translog flexible functional forms. Journal of Econometrics 30: 3-31.
Barnett WA., Lee WY, Wolfe MD. 1985. The global properties of the two Minflex Laurent flexible functional forms. Journal of Econometrics 36: 281-98.
Barnett WA., Choi S. 1989. A Monte Carlo study of tests of blockwise weak separability. Journal of Business and Economic Statistics 7: 363-377.
Barnett WA., Yue P. 1998. Semiparametric estimation of the Asymptotically Ideal Model: the AIM demand system. In Nonparametric and Robust Inference, Advances in Econometrics 7, Rhodes G, Formby T(eds). JAI Press: Greenwich, CT; 229-52.
Barten AP. 1964. Consumer demand functions under conditions of almost additive preferences. Econometrica 1-2: 1-38. Barten AP. 1968. Estimating demand equations. Econometrica Vol. 36(2): 213-51.
Barten AP. 1977. The systems of consumer demand functions approach: A Review. Econometrica 45: 23-51.
Berndt ER, Darrough MN, Diewert WE. 1977. Flexible functional forms and expenditure distribution: an application to Canadian consumer demand functions. International Economic Review. 18:651-75.
Blackorby C, Russell RR. 1981. The Morishima elasticity of substitution: symmetry, constancy, separability, and its relationship to the Hicks and Allen elasticities. Review of Economic Studies 48: 147-58.
Blackorby C, Russell RR. 1989. Will the real elasticity of substitution please stand up? (A comparison of the Allen/Uzawa and Morishima elasticities). American Economic Review 79: 882-888.
Caves DW, Christensen LR. 1980. Global properties of flexible functional forms. American Economic Review 70: 422- 32.
Christensen LR, Jorgenson DW, Lau LJ. 1975. Transcendental logarithmic utility functions. American Economic Review 65: 367-83.
Cooper RJ, McLaren KR. 1996. A system of demand equations satisfying effectively global regularity conditions. Review of Economics and Statistics.
Deaton A, Muellbauer J. 1980a. An Almost Ideal Demand System. American Economic Review 70: 312-26.
Deaton A, Muellbauer J. 1980b. Economics and consumer behavior. Cambridge University Press.
Denny M. 1974. The relationship between functional forms for production systems. Canadian Journal of Economics 7: 21-31.
Diewert WE. 1971. An Application of the Shephard duality theorem: a Generalized Leontief production function. Journal of Political Economy 79: 461-507.
Diewert WE. 1976. Essays in index number theory.
Diewert WE, Wales TJ. 1987. Flexible functional forms and global curvature conditions. Econometrica 55: 43-68.
El Badawi I, Gallant AR, Souza G. 1983. An elasticity can be estimated consistently without a prior knowledge of functional form. Econometrica 51: 1731-52.
Fisher D, Fleissig AR, Serletis A. 2001. An empirical comparison of flexible demand system functional forms. Journal of Applied Econometrics 16: 59-80.
Gallant AR. 1981. On the bias in flexible functional forms and an essentially unbiased form: The Fourier flexible form. Journal of Econometrics 15: 211-45.
Green, R. and JM Alston. 1990. Elasticities in AIDS Models. American Journal of Agricultural Economics. 72: 442-445.
Guilkey DK, Lovell CAK, Sickles RC. 1980. On the flexibility of the translog approximation. International Economic Review. 21:137-147.
Guilkey DK, Lovell CAK, Sickles RC. 1983. A comparison of the performance of three flexible functional forms. International Economic Review. 24: 591-616.
Hicks JR. 1932. Theory of wages. Macmillan: London.
Kadiyala KR. 1972. Production functions and elasticity of substitution. Southern Economic Journal 38: 281-284.
Morishima M. 1967. A few suggestions on the theory of elasticity. Keizai Hyoron (Economic Review) 16: 149-150.
Moschini G. 1995. Units of measurement and the Stone index in demand system estimation, American Journal of Agricultural Economics 77: 63-68.
Muellbauer J. 1975. Aggregation, income distribution, and consumer demand. Review of Economic Studies 42: 524-44.
Muellbauer J. 1976. Community preferences and the representative consumer. Econometrica 44:979-99.
Pashardes A. 1993. Bias in the estimation of the Almost Ideal Demand System with the Stone index approximation. Economic Journal 103: 908-915.
Theil H. 1965. The information approach to demand analysis. Econometrica 33: 67-87.
Theil H. 1975. Theory and measurement of consumer demand. Volume 1 . Amsterdam: North-Holland.
Theil H. 1975. Theory and measurement of consumer demand. Volume 2. Amsterdam: North-Holland.
Uzawa H. 1962. Production functions with constant elasticity of substitution. Review of Economic Studies 30: 291-99.