Barnett, William A. and KalondaKanyama, Isaac (2012): Timevarying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up?
This is the latest version of this item.

PDF
MPRA_paper_36608.pdf Download (401kB)  Preview 
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 timevarying 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 timevarying elasticities. More importantly, the RM has the ability to track the paths of timevarying income elasticities, even when the true values are very high. The linearapproximate AIDS, not only performs poorly at recovering the timevarying elasticities but also badly approximates the nonlinear AIDS.
Item Type:  MPRA Paper 

Original Title:  Timevarying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up? 
Language:  English 
Keywords:  almost ideal demand system, Rotterdam model, structural time series models, Monte Carlo experiment, theoretical regularity 
Subjects:  C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C51  Model Construction and Estimation D  Microeconomics > D1  Household Behavior and Family Economics > D12  Consumer Economics: Empirical Analysis C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C52  Model Evaluation, Validation, and Selection 
Item ID:  36608 
Depositing User:  William A. Barnett 
Date Deposited:  12. Feb 2012 18:10 
Last Modified:  12. Sep 2015 04:19 
References:  Alessie, R. and Kapteyn, A. (1991). Habit formation, interdependent preferences and demographic effects in the almost ideal demand system. The Economic Journal, 101(406):404419. Alston, J. M. and Chalfant, J. A. (1991). Can we take the con out of the meat demand studies? Western Journal of Agricultural Economics, 16(1):3648. Alston, J. M. and Chalfant, J. A. (1993). The silence of the lambdas: A test of the almost ideal and Rotterdam models. American Journal of AgriculturalEconomics, 75(2):304313. Alston, J. M., Foster, K. A., and Green, R. D. (1994). Estimating elasticities with the linear approximate almost ideal demand system: Some Monte Carlo results. The Review of Economics and Statistics, 76(2):351356. Barnett, W. A. (1977). Recursive subaggregation and generalized hypocycloidal demand model. Econometrica, 45(5):11171136. Barnett, W. A. (1979a). The joint allocation of leisure and good expenditure. Econometrica, 47(3):539563. Barnett, W. A. (1979b). Theoretical foundations for the Rotterdam model. The Review of Economic Studies, 46(1):109130. Barnett, W. A. and Choi, S. (1989). A Monte Carlo study of tests of blockwise weak separability. Journal of Business and Economic Statistics, 7(3):363377. Barnett, W. A. and Seck, O. (2008). Rotterdam model versus Almost Ideal Demand System: Will the best specification please stand up? Journal of Applied Econometrics, 23:795824. Barnett, W. A. and Serletis, A. (2008). Consumer preferences and demand systems. Journal of Econometrics, 147:210224. Barten, A. P. (1964). Consumer demand functions under conditions of almost additive preferences. Econometrica, 32(1/2):138. Barten, A. P. (1968). Estimating demand systems. Econometrica, 36(2):213251. Barten, A. P. (1969). Maximum likelihood estimation of a complete system of demand equations. European Economic Review, 1:773. Barten, A. P. (1977). The system of consumer demand function approach: A review. Econometrica, 45(1):2350. Barten, A. P. (1993). Consumer allocation models: Choice of functional form. Empirical Economics, 18:129158. Basmann, R. L. (19541955). A note on Mr. Ichimura's definition of related good. The Review of Economic Studies, 22(1):6769. Basmann, R. L. (1956). A theory of demand with variable consumer preferences. Econometrica, 24(1):4758. Basmann, R. L. (1972). Variable consumer preferences: Postscript. In Ekelund, R., Furuboth, E., and Gramm, W. P., editors, The Evolution of modern demand theory. Lexington Books, Lexington. Basmann, R. L. (1985). A theory of serial correlation of stochastic taste changers in direct utility functions. Econometric Theory, 1(2):192210. Basmann, R. L., Hayes, K., McAleer, M., McCarthy, I., and Slottje, D. J.(2009). The GFT utility function. In Slottje, D. J., editor, Quantifying consumer preferences, Contributions to Economic Analysis, Emerald Group Publishing, pp. 119148. Blackorby, C., Primont, D., and Russell, R. R. (2007). The Morishima gross elasticity of substitution. Journal of Productivity Analysis, 28:203208. Blackorby, C. and Russell, R. R. (1975). The partial elasticity of substitution. Department of Economics, University of California, San Diego. Blackorby, C. and Russell, R. R. (1981). The Morishima elasticity of substitution: Symmetry, constancy, separability, and its relationship to the HicksAllen elasticities. Review of Economic Studies, 48(1):147158. Blackorby, C. and Russell, R. R. (1989). Will the real elasticity of substitution please stand up? (a comparison of the Allen/Uzawa and Morishima elasticities). The American Economic Review, 79(4):882888. Brester, G. W. and Wohlgenant, M. K. (1991). Estimating interrelated demands for meats using new measures for ground and table cut beef. American Journal of Agricultural Economics, 73(4):11821194. Brown, M. G. and Lee, J.Y. (2002). Restriction on the effects of preference variables in the Rotterdam model. Journal of Agricultural and Applied Economics, 34(1):1726. Bryon, R. P. (1984). On the flexibility of the Rotterdam model. European Economic Review, 24:273283. Chavas, J. P. (1983). Structural change in the demand of meat. American Journal of Agricultural Economics, 65(1):148153. Christensen, L. R., Jorgenson, D. W., and Lau, L. J. (1975). Transcendental logarithmic utility functions. American Economic Review, 65(3):367383. Deaton, A. and Muellbauer, J. (1980a). An almost ideal demand system. The American Economic Review, 70(3):312326. Deaton, A. and Muellbauer, J. (1980b). Economics and consumer behavior. Cambridge University Press. Diewert, W. E. (1971). An application of the Shephard duality theorem: A generalized Leontief production function. The Journal of Political Economy, 79(3):461507. Doan, T. A. (2010a). Practical issues with statespace models with mixed stationary and nonstationary dynamics. Technical paper no. 20101, Estima. Doan, T. A. (2010b). Rats handbook for statespace models. Technical report. Doan, T. A. (2011). State space methods in rats. Journal of Statistical Software, 41(9):116. Doran, H. E. (1992). Constraining Kalman filter and smoothing estimates to satisfy timevarying restrictions. The Review of Economics and Statistics,74(3):568572. Doran, H. E. and Rambaldi, A. N. (1997). Applying linear timevarying constraints to econometric models: With an application to demand systems. Journal of Econometrics, 79:8395. Eales, J. S. and Unnevehr, L. J. (1988). Demand for beef and chicken products: Separability and structural change. American Journal of Agricultural Economics, 70(3):521532. Estima (2007a). RATS Reference Manual. Estima (2007b). RATS User Manual. Gaertner, W. (1974). A dynamic model of interdependent consumer behavior. Journal of Economics, 34(34):327344. Green, R. and Alston, J. M. (1990). Elasticities in the AIDS model. American Journal of Agricultural Economics, 72(2):442445. Green, R. and Alston, J. M. (1991). Elasticities in AIDS models: A clarification and extension. American Journal of Agricultural Economics, 73(3):874875. Harvey, A. C. (1989). Forecasting, structural time series models and the Kalman filter. Cambridge University Press, Cambridge. Ichimura, S. (1950). A critical note on the definition of related goods. The Review of Economic Studies, 18(3):179183. Kapteyn, A., Van de Geer, S., Van de Stadt, H., and Wansbeek, T. (1997). Interdependent preferences: An econometric analysis. Journal of Applied Econometrics, 12(6):665686. Karni, E. and Schmeidler, D. (1990). Fixed preferences and changing tastes. The American Economic Review, 80(2):262267. Koopman, S. J. (1997). Exact initial Kalman filtering and smoothing for nonstationary time series models. Journal of the American Statistical Association, 92(440):16301638. Leybourne, S. J. (1993). Empirical performance of the AIDS model: constantcoefficient versus timevaryingcoefficient approaches. Applied Economics, 25:453463. Mazzocchi, M. (2003). Timevarying coefficient in the almost ideal demand system: an empirical appraisal. European Review of Agricultural Economics, 30(2):241270. Morishima, M. (1967). A few suggestions on the theory of elasticity. Keizai Hyoron(Economic Review), 16:149150. Moschini, G. and Meilke, K. D. (1989). Modeling the pattern of structural change in U.S. meat demand. American Journal of Agricultural Economics, 71(2):253261. Pollak, R. A. (1976). Interdependence preferences. The American Economic Review, 66(3):309320. Pollak, R. A. (1978). Endogenous tastes in demand and welfare analysis. The American Economic Review, 68(2):374379. Sobel, J. (2005). Interdependent preferences and reciprocity. Journal of Economic Literature, 43(2):392436. Theil, H. (1965). The information approach to demand analysis. Econometrica, 33(1):6787. Theil, H. (1971). Principles of Econometrics. John Wiley & Sons, New York, New York. Theil, H. (1975a). Theory and measurement of consumer demand, volume 1. NorthHolland, Amsterdam. Theil, H. (1975b). Theory and measurement of consumer demand, volume 2. NorthHolland, Amsterdam. Theil, H. (1980a). Systemwide approach to microeconomics. University of Chicago Press, Chicago. Theil, H. (1980b). Systemwide exploration in international economics. Inputoutput analysis and marketing research. NorthHolland Publishing Company, New York. Tintner, G. (1952). Complementarity and shifts in demand. Metroeconomica, 4(1):14. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/36608 
Available Versions of this Item

Timevarying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up? (deposited 08. Feb 2012 04:03)
 Timevarying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up? (deposited 12. Feb 2012 18:10) [Currently Displayed]