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European Review of Agricultural Economics vol. 30 no. 4 © Oxford University Press and Foundation for the European Review of Agricultural Economics 2003; all rights reserved

Forecasting ability of theory-constrained two-stage demand systems

Geir Wæhler Gustavsen

Norwegian Agricultural Economics Research Institute, Oslo, Norway

Kyrre Rickertsen

Agricultural University of Norway, Aas, Norway, and Norwegian Agricultural Economics Research Institute, Oslo, Norway

Corresponding author: Kyrre Rickertsen, Agricultural University of Norway, Department of Economics and Resource Management, PO Box 5033, N 1432 Aas, Norway. E-mail: kyrre.rickertsen{at}ior.nhl.no

Received December 2001; Revision received August 2003.

Summary

Demand models are commonly used to forecast effects of policy changes and two-stage demand systems are frequently used when disaggregated food items are involved. A two-stage system implies interconnections between the stages. These interconnections can be modelled to make unconditional forecasts, or the second stage can be modelled separately to make conditional forecasts. We compare conditional and unconditional elasticity-based and direct statistical forecasts. For our data, conditional forecasts are superior to unconditional forecasts and forecasts derived from elasticities are superior to direct statistical forecasts. Imposition of the homogeneity and symmetry restrictions of consumer theory does not improve the forecasts.

Keywords: dairy demand, demand system, forecasting, two-stage budgeting

JEL classification: Q11


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