Invariance, Price Indices, and Estimation of Almost Ideal Demand System

Posted: 11 Apr 2005

See all articles by Adolf Buse

Adolf Buse

affiliation not provided to SSRN

Wing H. Chan

Wilfrid Laurier University - School of Business & Economics; City University of Hong Kong (CityU) - Department of Economics & Finance

Abstract

Two issues are addressed in this paper. First, we explore the issue of price index invariance in the linearized Almost Ideal Demand system. We establish that the Stone index, which lacks invariance, and the recently proposed invariant Laspeyres, Paasche and Tornqvist indices all generate biased and inconsistent estimators. Monte Carlo evidence shows that invariance does not necessary lead to better estimates of price and income elasticities insofar as the Stone and Paasche indices are unambiguously inferior to the Laspeyres and Tornqvist indices, especially if prices are not strongly positively correlated. Second, we examine the merits of the widely used conditional ML estimator of the non-linear Almost Ideal system in which a prior value is chosen for the subsistence parameter. We find that the bias and trace mean square error increases induced by conditional estimation are modest. The choice between the linearized and the non-linear models favors the latter although in some cases linear methods are as goog as non-linear.

Keywords: AIDS model, price indices, invariance, conditional estimation, Monte Carlo

JEL Classification: D12

Suggested Citation

Buse, Adolf and Chan, Wing H., Invariance, Price Indices, and Estimation of Almost Ideal Demand System. Available at SSRN: https://ssrn.com/abstract=686510

Adolf Buse

affiliation not provided to SSRN

Wing H. Chan (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884-0710, ext. 2773 (Phone)
519-888-1015 (Fax)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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