Abstract
Two common findings in empirical analyses of static demand systems are a rejection of the homogeneity postulate together with significant positive serial correlation in the residuals. The thesis of this paper is that these findings reflect an inadequate dynamic specification of the demand functions. An Almost (AI) Demand System is specified which incorporates habits and durability into the utility function and is applied to British data for the period 1954–1980. A static AI model is also estimated. While the static form strongly contradicts homogeneity and symmetry and suffers from serially correlated residuals, homogeneity and symmetry are easily acceptable in the dynamic form and there is no evidence of serially correlated residuals.
The early phase of Muellbauer’s contribution to this research was supported by the E.S.R.C. under the Research Programme in Quantitative and Comparative Macroeconomics, grant number HR 6235, and more recently under grant BO0220012 for research on “The Roles of Expectational Variables and Feedback Mechanisms in Econometric Models” (with David Hendry). The Institute of Fiscal Studies supported Pashardes’s contribution.
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Muellbauer, J., Pashardes, P. (1992). Tests of Dynamic Specification and Homogeneity in a Demand System. In: Phlips, L., Taylor, L.D. (eds) Aggregation, Consumption and Trade. Advanced Studies in Theoretical and Applied Econometrics, vol 27. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-1795-1_5
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DOI: https://doi.org/10.1007/978-94-011-1795-1_5
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