Time-Varying Parameter in the Almost Ideal Demand System and the Rotterdam Model: Will the Best Specification Please Stand Up?

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 nd 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.

Related Journal

Applied Economics, 2013
12 March 2013
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18 March 2013
Publication Type: Working Paper
Keyword: HIV/AIDS
JEL Code: C51, C52, D12