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A Dynamic Almost Ideal Demand System Incorporating Consumer Expectations

Paul M. Taube and Don N. MacDonald
Managerial and Decision Economics
Vol. 12, No. 3 (Jun., 1991), pp. 197-206
Published by: Wiley
Stable URL: http://www.jstor.org/stable/2487526
Page Count: 10
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A Dynamic Almost Ideal Demand System Incorporating Consumer Expectations
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Abstract

In this paper a theoretical framework is presented for the analysis of the effects of psychological, perceptual or expectational factors on household expenditure within a complete demand system. The model was estimated using the Consumer Sentiment Index, which represents an index of consumer perceptions of economic conditions. Evidence was found for significant expectational effects on five of nine expenditure categories-food at home, alcohol, housing, durables and other services. The direct expectation effects were found to be small in size. The results demonstrate the model's potential usefulness as a framework for modelling consumer behavioral responses to expectations and for evaluating the welfare implications of policy-induced changes in expectations.

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