The estimation of LES demand elasticities for CGE models

Computable general equilibrium (CGE) models require external parameters for proper estimations and can be relatively sensitive to the elasticity estimates used in them. We estimate LES demand elasticities and Frisch parameters for all Finnish household income deciles. These estimates will be used also inVATTAGE CGE model. We use three different methodologies for the estimation of demand elasticities: price index based approach, pseudo-panel dataset based regressions with exogenous Frisch parameters, and finally cross-section data based estimations with the Frisch parameters. Only the last methodology provides adequate results despite the use of detailed and extensive data. We conclude that the estimation of LES demand elasticities for narrow commodity groups is cumbersome with standard household consumption survey data. Typically these surveys account consumption only from a time period of a few weeks. The chance of consuming various durable consumption items during such a short time period is low. Use of longer survey periods could decrease the share of zero consumption observations and help on the identification of elasticities.