THE EXTENDED ECONOMETRIC INPUT-OUTPUT MODEL WITH HETEROGENEOUS HOUSEHOLD DEMAND SYSTEM

This paper proposes an extension to the regional econometric input-output model (REIM) [Conway, R.S. (1990) The Washington Projection and Simulation Model: A Regional Interindustry Econometric Model. International Regional Science Review, 13, 141-165; Israilevich, P.R., G.J.D. Hewings, M. Sonis and G.R. Schindler (1997) Forecasting Structural Change with a Regional Econometric Input-Output Model. Journal of Regional Science, 37, 565-590]. We integrate a demand system with age and income parameters into the REIM. The extended model thus addresses concerns about the effects of household heterogeneity. The initial testing is conducted with a model for the Chicago metropolitan area. First, using aggregate expenditure data by income and age groups, the almost ideal demand system with group fixed effects is constructed. Next, the estimated demand system is linked to the REIM to reflect long-term changes in the age and income distribution of households. The long-range simulation from the extended model takes into account structural changes in expenditure type stemming from changing demographic composition. The extended model further broadens the scope of impact analysis under various scenarios associated with age and income changes.