Evaluating the Linearized Almost Ideal Demand System

Abstract

Abstract Linearizing the Almost Ideal Demand System (LAIDS) by recourse to the Stone share weighted price index is common practice. Two issues are addressed here. First, scrutiny of the errors‐in‐variables implications of the linearization reveals that, not only is the SUR estimator inconsistent, but a consistent IV estimator cannot be constructed. Second, some alternatives to the Green‐Alston elasticities specifically designed for the LAIDS model are developed, but neither these nor the Green‐Alston elasticities are found to have any advantages over the conventional elasticity formulae. Some errors in the Green‐Alston (1990) paper are corrected. The inconsistency and elasticity issues are documented by a Monte Carlo investigation.

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