Abstract
Numerous recent empirical demand studies utilize the habit formation and state variable approaches to describe dynamic demand behavior. In this paper, we suggest the introduction of polynomial price response functions as an alternative method of generating dynamic conditional demand systems. This approach allows direct estimation of the degree of price substitutability among products and the timing of price effects. The application presented here involves the estimation of dynamic CES and indirect additive translog demand systems for U.S. clothing imports. The estimated price response lag structures and matrices of long-run price elasticities are presented and analyzed. Also, the precision of the non-parametric price elasticity estimates is evaluated by computing approximate asymptotic standard errors.
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