High Food Prices and their Implications for Poverty in Uganda From Demand System Estimation to Simulation

This paper represents an initial attempt at assessing the importance of estimated demand systems for the simulation of large price shocks with respect to poverty analysis. Using a Ugandan household survey data set and an estimated flexible demand system, three different approaches to simulating the compensated expenditure budget due to large food price shocks are compared: a non-behavioral microaccounting, and three behavioral demand systems (LES, CDE, and QUAIDS). The aim of this study is twofold. First, to provide an indication whether it is worthwhile to invest in the estimation of a demand system for similar consumption side poverty impact analyses. Second, to provide a sense of the magnitude in the loss of fidelity from using a less flexible instead of a more flexible demand system within computable general equilibrium analyses of poverty impacts. The results show that using no demand system overestimates poverty impacts to quite some extent. The differences between using either of the three demand systems are rather small but may be more substantial in the extremes.