Estimating the consumption system in MAKRO



In this working paper, the elasticities of substitution between the various consumption components in MAKRO are estimated. Since the share parameters are unknown, a time varying process is specified. Thus, the Kalman filter can be used to simultane-ously estimate the elasticities as well as the share parameters that express shifts in preferences for the individual consumption components. It is assumed that shifts in preferences can be decomposed into a structural and a cyclical part, with the for-mer expressing long run trends that are allowed to deviate from a linear trend. The latter express short run fluctuations, e.g. because of cyclical changes in the econ-omy. This setup results in plausible parameter estimates and leads to a well-specified model.