Parsimonious Estimation of LES Parameters with Heterogeneous Households for a Static CGE Model

The main purpose of this study is to provide some microeconomic tools for the calibration of a computable general equilibrium (CGE) model for Iran. For decades, CGE models have increasingly been used to study the economic and social consequences of government policy schemes and the distribution of economic resources in both developing and developed nations. In this paper we estimate subsistence expenditures, own-price elasticities and income elasticities for 20 household groups disaggregated by income and location. Since mapping private consumption to disaggregated households is crucial to analysing the behaviour of various income groups in CGE models, the purpose of our research is to set up a system of demand equations for all commodities included in the Urban and Rural Households Income and Expenditure Survey of 2004 for Iran using the Classification of Individual Consumption According to Purpose (COICOP), and to estimate linear expenditure system (LES) parameters. The seemingly unrelated regression equations (SURE) model is used to solve a seventeen-good demand system simultaneously. Results should be relevant to CGE modellers seeking to calibrate a disaggregated consumption sector for middle-level developing economies which, like Iran, are dominated by large resource sectors and subject to government intervention and control.