Stone–Geary meets CES: the properties of an extended linear expenditure system

Abstract

Abstract The structure of demand plays a fundamental role in shaping economic equilibrium. In computable general equilibrium analysis, comparative statics allow us to simulate how policies or external adjustments impact the equilibrium state. The results of these simulations are significantly influenced by the nature of the adopted demand structure. Typically, homothetic demand structures are frequently used for simplicity in these equilibrium models, but they do not accurately capture demand behavior. In this text, we study the properties of a demand system that eliminates demand constraints often found in general equilibrium models. Specifically, we first explore the characteristics of a demand system that generalizes the standard Stone–Geary linear demand structure. Second, we illustrate its possibilities with an empirical application using available Spanish data.

Keywords

• Linear expenditure systems
• Constant elasticity of substitution
• Calibrated demand functions
• Computable general equilibrium