A linear demand system within a seemingly unrelated time series equations framework

A seemingly unrelated time series equations framework for the linear almost ideal (AID) demand system is considered. The framework is applied to a consumer demand system covering nine non-durable commodities. Within a specification where the static linear AID system is augmented by latent variables representing stochastic trends and seasonality, demand homogeneity is tested; both in each equation and in the system as a whole. Income and own-price elasticities are calculated under homogeneity restrictions. Although the homogeneous model is formally rejected by statistical tests, it performs well with respect to interpretability, parameter stability and forecasting.