Selection of nonnested demand models

This paper applies the likelihood dominance criterion (LDC), a new method of model selection developed by Pollak and Wales (1991), to four popular demand equation systems, using a set of seasonally adjusted quarterly Canadian data series. The results indicate that the almost ideal demand system (AIDS) dominates various alternative demand systems. The LDC method is useful in assisting demand analysts in selecting the proper demand specification. The paper also includes tests for unit roots and cointegration and, based on these tests, an error corrections model is estimated and tested against the popular but not theoretically plausible linear approximate almost ideal demand system.