Time-varying coefficients in the almost ideal demand system: An empirical appraisal

Mazzocchi, M. (2003) Time-varying coefficients in the almost ideal demand system: An empirical appraisal. European Review of Agricultural Economics, 30 (2). pp. 241-270. ISSN 0165-1587

Abstract/Summary

This paper provides a generalisation of the structural time series version of the Almost Ideal Demand System (AIDS) that allows for time-varying coefficients (TVC/AIDS) in the presence of cross-equation constraints. An empirical appraisal of the TVC/AIDS is made using a dynamic AIDS with trending intercept as the baseline model with a data set from the Italian Household Budget Survey (1986-2001). The assessment is based on four criteria: adherence to theoretical constraints, statistical diagnostics on residuals, forecasting performance and economic meaningfulness. No clear evidence is found for superior performance of the TVC/AIDS, apart from improved short-term forecasts.