The Role of Theoretical Restrictions in Forecasting with Inverse Demand Models

In recent years, the theoretical restrictions of consumer demand have been examined in post-sample forecasting exercises. However, this work has uniformly ignored associated curvature restrictions. In this paper we evaluate a series of Normalized Quadratic Inverse Demand System (NQIDS) specifications by using rolling windows and generating one- to four-step ahead forecasts. Data for eleven categories of South Atlantic fish spanning 1980 through 2001 are used in estimation. In addition to the NQIDS, we also examine the forecasting performance of a Cobb--Douglas model with autoregressive errors. We find that the best predictions are achieved using a composite forecast. Copyright 2010, Oxford University Press.