Modelling Sri Lankan consumption patterns using error corrected LA-AIDS

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Author(s)
Rathnayaka, Shashika D
Selvanathan, Saroja
Selvanathan, EA
Kler, Parvinder
Year published
2018
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Static-demand systems used in empirical studies are based on the assumption that consumers immediately and fully adjust to a new equilibrium when either incomes or prices change. In reality, consumers are unlikely to have adjusted to equilibrium in each time period and the assumption of instantaneous adjustments by consumers is potentially incorrect. The dynamic modelling approach allows for intertemporal rationality of consumer behaviour by explicitly considering the mechanism underlying the short-run adjustment process. This study, while considering the traditional static Almost Ideal Demand System (AIDS), in addition, ...
View more >Static-demand systems used in empirical studies are based on the assumption that consumers immediately and fully adjust to a new equilibrium when either incomes or prices change. In reality, consumers are unlikely to have adjusted to equilibrium in each time period and the assumption of instantaneous adjustments by consumers is potentially incorrect. The dynamic modelling approach allows for intertemporal rationality of consumer behaviour by explicitly considering the mechanism underlying the short-run adjustment process. This study, while considering the traditional static Almost Ideal Demand System (AIDS), in addition, considers two dynamic versions of the AIDS to model the dynamic behaviour of Sri Lankan consumers in consuming eight broad commodity groups using data during the period 1963–2016. The estimated results indicate that all commodities have price inelastic demand in both the short and long run. The differences between short- and long-run demand elasticities indicate the need to adopt a dynamic approach in estimating demand elasticities, because the income and price elasticities are key inputs for policy analysis in economy-wide modelling.
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View more >Static-demand systems used in empirical studies are based on the assumption that consumers immediately and fully adjust to a new equilibrium when either incomes or prices change. In reality, consumers are unlikely to have adjusted to equilibrium in each time period and the assumption of instantaneous adjustments by consumers is potentially incorrect. The dynamic modelling approach allows for intertemporal rationality of consumer behaviour by explicitly considering the mechanism underlying the short-run adjustment process. This study, while considering the traditional static Almost Ideal Demand System (AIDS), in addition, considers two dynamic versions of the AIDS to model the dynamic behaviour of Sri Lankan consumers in consuming eight broad commodity groups using data during the period 1963–2016. The estimated results indicate that all commodities have price inelastic demand in both the short and long run. The differences between short- and long-run demand elasticities indicate the need to adopt a dynamic approach in estimating demand elasticities, because the income and price elasticities are key inputs for policy analysis in economy-wide modelling.
View less >
Journal Title
Economic Modelling
Copyright Statement
© 2018 Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence (http://creativecommons.org/licenses/by-nc-nd/4.0/) which permits unrestricted, non-commercial use, distribution and reproduction in any medium, providing that the work is properly cited.
Subject
Applied economics
Econometrics
Banking, finance and investment