Stone-Geary Meets CES: An Extended Linear Expenditure System

• Authors: Ferran Sancho.
• BSE Working Paper: 110800 | March 22
• Keywords: linear expenditure system , constant elasticity of substitution , calibrated demand functions
• JEL codes: C55, D11, D12
• linear expenditure system
• constant elasticity of substitution
• calibrated demand functions

We reformulate the Stone-Geary utility function to incorporate non-unitary elasticities of substitution. We show that this extended linear expenditure system includes the standard Stone-Geary case but eliminates some of its restrictions. In particular, and most significantly, the proportions of expenditure over leftover income become price responsive under the extended demand system.