Demand for international telecommunication - Time-varying price elasticity

In this empirical study, the price elasticity of the demand for telecommunication between Sweden and three destination countries, Germany (FRG), United Kingdom, and USA, was investigated. Within the constant parameter framework the structural relations identified to explain the telecommunication demand are similar for the three countries. The short- and long-term price elasticities of the demand derived from the models are in the range that is reported in other empirical studies. However, recursive estimation and the analysis of recursive residuals support theoretical assumptions of time variability of price elasticity. Kalman filtering in various versions, differing in the way of determining the hyperparameters, as well as moving local regression analysis are applied to estimate the trajectories of the price elasticity.