Time-varying coefficients in the Almost Ideal Demand System: An empirical appraisal

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.