Alternative Panel Estimates of Alcohol Demand, Taxation, and the Business Cycle

This paper uses a new technique of estimating dynamic heterogeneous panels developed by Pesaran, Shin, and Smith (1999) on state-level alcohol consumption as a function of income, taxes, and cyclical variables. Pooled mean group (PMG) estimators provide an alternative to extremes of pooling the data assuming slope homogeneity and estimating individual states assuming complete heterogeneity. Postsample tests indicate that a conventional fixed-effects model outperforms both the PMG estimator and individual state estimators, despite the heterogeneity of the sample. Current levels of taxation appear to have little effect on alcohol consumption, and alcohol is found to be a procyclical good.