Linear approximations to the quadratic almost ideal demand system

This paper investigates linear approximations to the recently popular quadratic almost ideal demand system (QUAIDS) by proposing a new composite variable and conducting a simulation study. The linear approximations are especially useful when one uses nonstationary time series, to which nonlinear systems are difficult to apply properly. The new composite variable performs well in combination with the price indices appropriate for linearizing the almost ideal demand system. The QUAIDS can be linearly approximated on a practical basis if the appropriate combinations of composite variables and elasticity formulas are employed and the base point is set to the point of evaluation.

The US retail demand for fish products: an application of the almost ideal demand system

The main objective is to address the limitations of past US fish demand research through the development of a variation of the almost ideal demand system model for disaggregate fish products at the retail level. Price and expenditure elasticities, as well as elasticities of substitution between fish products and other protein commodities, determined from this work may be used in the context of fisheries management and market development and promotion. Results indicate that with the exception of shellfish, demand for the various fish products is relatively inelastic. Cross-price elasticities are generally moderate while expenditure elasticities are large and positive for fresh fish and shellfish. Demographic effects, especially geographical division, season, race, occupation, age–sex household composition, and price–income interaction, as a proxy for quality, are highly significant variables.     

An almost ideal demand system for alcoholic beverages in British Columbia

An almost ideal demand system for alcoholic beverages in British Columbia is estimated based on five beverage categories. Estimates of the model unrestricted and restricted to satisfy homogeneity and symmetry are presented. The restrictions are tested: as is common in applied demand analysis a number of rejections are encountered, although within-equation tests tend to support homogeneity. The rejections which are encountered are not mitigated by the inclusion of dynamic elements. The Slutsky matrix is used to examine the concavity of the expenditure function, which is found to be mildly violated. Marshallian and Hicksian own-, cross-price, and income elasticities are calculated and are found to be largely consistent with previous findings, although some noteworthy results are obtained.     

Estimating the Markov-switching almost ideal demand systems: a Bayesian approach

Allias and Nichèle (Eur Rev Agric Econ, 34(4):517–538, 2007) proposed a Markov-switching almost ideal demand system (MS-AIDS) model by extending the idea of Hamilton (Econometrica, 57(2):357–384, 1989). In this paper, we propose a Bayesian estimation for MS-AIDS model and illustrate applicability of our proposed method. We then run two sets of simulation studies to confirm the validity of the proposed method. In the empirical study on the Japanese meat market, our Bayesian estimation improves the MSEs for all meat products over the ML estimation, while successfully capturing the regime shifts of meat demand coinciding with the timing of bovine spongiform encephalopathy cases in Japan and US.     

A globally flexible,quadratic almost ideal demand system: an application to demand for meats and fish in Taiwan

A new demand system, called a globally flexible, quadratic almost ideal demand system (GF–QUAIDS), integrates both the quadratic Engel curve and the Fourier series. This novel GF–QUAIDS model is applied to study the demand for meats and fish in Taiwan. Empirical results show that the GF–QUAIDS fits the data well and that, by using the likelihood ratio test, its nested models are rejected, including the locally flexible functional form and the linear Engel curve. Nevertheless, other empirical model-selection measures indicate that the GF–QUAIDS can be as good as its famous nested models such as the AIDS, QUAIDS and GF–AIDS.     

Aggregation effects on price and expenditure elasticities in a quadratic almost ideal demand system

Abstract.  While it is well known that demand elasticities calculated at the macro level will in general differ from those calculated at the micro level because of aggregation effects, there remain the questions of how large the effects are and how they vary with the degree of inequality in the income distribution. We explore these questions with models based on a quadratic version of the Almost Ideal Demand System. We investigate the elasticity differences theoretically and then calibrate the models and generate numerical results, using income data for seven countries with widely different distributions. The aggregation effects are found generally to be rather small, even with highly unequal income distributions.     

Dynamic almost ideal demand systems: an empirical analysis of alcohol expenditure in Ireland

This paper presents a dynamic form of the Almost Ideal Demand System (AIDS). Three versions of the static AIDS model are employed to determine the preferred long-run equilibrium model and represents the short-run dynamics by an error correction mechanism. This estimation procedure is then applied to alcohol expenditure in Ireland. The estimated point elasticities are consistent with previous studies and a priori expectations. Beer and spirits are found to be price inelastic in both the short and long run. While wine is price inelastic in the short run and price elastic in the long run.     

KLEM substitutability: a dynamic flexible demand system

The theory of intertemporal budget constraint is applied to test Italian public debt sustainability, with the finding that current fiscal policy has not been following a sustainable path in the 1980s. In particular, we find that (i) while primary surplus is stationary, public debt is not, (ii) permanent shocks explain about 90% of forecast error variance of public debt, while playing a minor role in primary surplus and (iii) debt is not sustainable even if stochastic discount rates are accounted for.     

On the uniqueness of individual demand at almost every price system

A simple new proof, based on Fubini's theorem, is given for the uniqueness of individual demand at almost every price system, even if preferences are nonconvex.     

An investigation into the demand for alcoholic beverages in Canada: a choice between the almost ideal and the Rotterdam models

In this article I investigate the historical pattern of interactions in the demand for three categories of alcoholic beverages in Canada, using both the differential Almost Ideal and the differential Rotterdam demand systems. I evaluate these models based on several decision criteria including model encompassment (based on the J-test), structural stability, conformity with demand theory and the credibility of the estimated price and income responses, in an attempt to determine which of these models is better suited for explaining the demand for alcoholic beverages. The results reveal that both models satisfy the restrictions of demand theory and of structural stability but the Rotterdam model is preferable on grounds of the remaining two criteria.     

Financial innovation and demand for money: some empirical evidence

Recent criticism of money growth targets has been based on the implications of spreading financial innovation, since the latter has been considered to undermine monetary policy effectiveness both by bringing about an increase in the interest elasticity of money demand and by producing instability of the money demand function. The empirical results presented in this paper – focusing on a single and specific case of financial innovation particularly suited to study the isssue at stake – falsify both hypotheses.     

Comparing alternative Phillips curve specifications: European results with survey-based expectations

This article examines inflation dynamics in Europe. Econometric specification tests with pooled European data are used to compare the empirical performance of the New Classical, New Keynesian and Hybrid specifications of the Phillips curve. Instead of imposing any specific form of expectations formation, direct measures, i.e. Consensus Economics survey data are used to proxy economic agents’ inflation expectations. According to the results, the New Classical Phillips curve has satisfactory statistical properties. Moreover, the purely forward-looking New Keynesian Phillips curve is clearly outperformed by the New Classical and Hybrid Phillips curves. We interpret our results as indicating that the European inflation process is not purely forward looking and inflation cannot instantaneously adjust to changes in expectations. Consequently, even allowing for possible nonrationality in expectations results in a lagged inflation term entering the New Keynesian Phillips curve for inflation dynamics in Europe.     

Effects of income distribution in an inverse demand system: evidence from Chinese household survey data

This study provides an empirical analysis of the impact of changes in income distribution on food demand in China using data from China Health and Nutrition Survey. A new parametric form of an inverse demand system is introduced and estimated taking into account reported zero consumption. This new form is a natural extension of recent works that accommodate the incorporation of income distribution into the system and imposition of global regularity conditions in estimation. Our results generally indicate that the distribution of households across income groups is important in determining food demand in China and that a movement towards a more equal income distribution in China will stimulate the demand for vegetable, fruit, fish and eggs.     

Stock prices and long-run demand for money: evidence from Malaysia

This paper investigates the money demand function for Malaysia in the 1971-1996 period using the multivariate cointegration and error correction model methodology. The results suggest that a stable long-run relationship exist between real M2, the interest rate differential, income and stock prices. Stock prices have a significant negative substitute effect on long-run as well as short-run broad-money demand (M2) and its omission can lead to serious misspecification in the money demand function. The analysis from the vector error correction model (VECM) and the Toda & Yamamoto (1995) causality tests find that money is endogenous and that there is at least a unidirectional relationship between stock prices and real M2. Stock prices Granger cause real M2 indirectly through income between interest rates and stock prices and stock prices and money stock. This paper comes to the conclusion that due to the endogeneity of money, M2 cannot be completely controlled by Malaysia's central bank. Therefore, in formulating future monetary policy, the response of money demand to stock prices should be considered.     

Tax perceptions and the demand for public expenditure: evidence from UK micro-data

Using responses from the 1995 British Social Attitudes Survey (BSAS), this paper assesses if there is evidence of voter misperception of tax costs. We find convincing evidence of income tax (IT) and value added tax (VAT) misperceptions, with a systematic bias towards overestimation of tax burdens for VAT, contrary to predictions of the fiscal illusion literature. We then integrate tax misperceptions into a model of demand for public expenditure. Voters' spending preferences are strongly related to their incomes, actual tax costs, and other fiscal-related household characteristics. A tendency to overestimate tax burdens appears to have only a modest influence on demands for public spending.     

The demand for relational goods: empirical evidence from the European Social Survey

How are happiness and the demand for relational goods and status goods related? Using cross-sectional data from the European Social Survey, this relationship is investigated for European countries. The main result is that the demand for relational goods is not reduced by high opportunity costs of time. Rather, both wage rate and income are positively related to the frequency of social contacts. In contrast to financial means, while status is more important for happiness in richer European countries than in poorer ones, social status is not decisive for the frequency of meeting friends regardless of the home country’s economic well-being. Thus, while no crowding out of relational contacts by status could be observed, relational goods are even boosted by material well-being.     

Workplace risks and wages: Canadian evidence from alternative models

Three alternative models of compensating wage premiums for risk are estimated: the conventional OLS wage regression; an endogenous risk model that accounts for the simultaneity that may occur if workers of high potential earnings prefer safer jobs; and a self-selection model to account for the possibility that workers sort into jobs based on unobserved tolerance for risk that affects their productivity in dangerous work environments. The results suggest that the existing Canadian estimates, which have been based on the basic model, may seriously underestimate the wage premium for risk and hence the implied cost of fatal and non-fatal injuries. JEL Classification: J28, J31
Risques au travail et salaires: résultats canadiens pour plusieurs modèles. Les auteurs calibrent trois modèles pour évaluer la compensation salariale pour les risques au travail: l'équation conventionnelle de régression des salaires estimée par la méthode des moindres carrés ordinaires; un modèle de risque endogène qui tient compte de la simultanéité qui peut se produire si les travailleurs dont les revenus potentiels sont élevés préfèrent les emplois où il y a moins de risques; un modèle d'auto-sélection où les travailleurs se répartissent entre les emplois sur la base d'une tolérance non-observée pour le risque qui affecte leur productivité dans des environnements de travail dangereux. Les résultats suggèrent que les évaluations canadiennes en vogue, qui sont fondées sur le modèle de base, peuvent sous-estimer sérieusement la prime salariale de risque et donc les coûts des blessures mortelles ou non que les accidents entraînent.     

Forecasting house prices using dynamic model averaging approach: Evidence from China

Forecasting house price has been of great interests for macroeconomists, policy makers and investors in recent years. To improve the forecasting accuracy, this paper introduces a dynamic model averaging (DMA) method to forecast the growth rate of house prices in 30 major Chinese cities. The advantage of DMA is that this method allows both the sets of predictors (forecasting models) as well as their coefficients to change over time. Both recursive and rolling forecasting modes are applied to compare the performance of DMA with other traditional forecasting models. Furthermore, a model confidence set (MCS) test is used to statistically evaluate the forecasting efficiency of different models. The empirical results reveal that DMA generally outperforms other models, such as Bayesian model averaging (BMA), information-theoretic model averaging (ITMA) and equal-weighted averaging (EW), in both recursive and rolling forecasting modes. In addition, in recent years it is found that the Google search index, instead of fundamental macroeconomic or monetary indicators, has developed greater predictive power for house price in China.