On Micro Economics I:
The Use of TETRAD for Demand Specification: David Bessler
Abstract: We offer a quick review or coverage of standard micro theory and two major econometric demand estimation models that impose that theory: the Almost Ideal Demand System (AIDS) of Deaton and Muellbauer (1980) and the Rotterdam system of Theil (1966). Additional specifications on a much older demand model of Stone (1953) and a recent system of Lewbel and Pendakur (2009) have the same general form and are reviewed. We contrast model specification results from US meat product demands found with TETRAD (GES algorithm) with the AIDS and Rotterdam specifications. Out-of-sample forecasting performance shows TETRAD issues lower root mean squared forecasting errors for two of three meat products relative to the AIDS and Rotterdam models. A less theory rich specification with TETRAD (LiNGAM) concludes the presentation by looking at Food (Cereals) Prices, Conflict, and Deaths from Conflict in the Sudan. Again we see a rich relationship among our food price series not unlike that found in the meat demand example presented earlier - a relationship that standard demand models seem to ignore.