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Simultaneous Equations Model

In: Solutions Manual for Econometrics

Author

Listed:
  • Badi H. Baltagi

    (Syracuse University)

Abstract
Economists formulate models for consumption, production, investment, money demand and money supply, labor demand and labor supply to attempt to explain the workings of the economy. These behavioral equations are estimated equation by equation or jointly as a system of equations. These are known as simultaneous equations models. Much of today’s econometrics have been influenced and shaped by a group of economists and econometricians known as the Cowles Commission who worked together at the University of Chicago in the late 1940’s, see Chapter 1. Simultaneous equations models had their genesis in economics during that period. Haavelmo’s (1944) work emphasized the use of the probability approach to formulating econometric models. Koopmans and Marschak (1950) and Koopmans and Hood (1953) in two influential Cowles Commission monographs provided the appropriate statistical procedures for handling simultaneous equations models. In this chapter, we first give simple examples of simultaneous equations models and show why the least squares estimator is no longer appropriate. Next, we discuss the important problem of identification and give a simple necessary but not sufficient condition that helps check whether a specific equation is identified. Sections 11.2 and 11.3 give the estimation of a single and a system of equations using instrumental variable procedures. Section 11.4 gives a test of over-identification restrictions whereas, section 11.5 gives a Hausman specification test. Section 11.6 concludes with an empirical example. The Appendix revisits the identification problem and gives a necessary and sufficient condition for identification.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Badi H. Baltagi, 2015. "Simultaneous Equations Model," Springer Texts in Business and Economics, in: Solutions Manual for Econometrics, edition 3, chapter 0, pages 259-311, Springer.
    • Handle: RePEc:spr:sptchp:978-3-642-54548-1_11
    DOI: 10.1007/978-3-642-54548-1_11
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    Cited by:

    1. Poulomi BHATTACHARYA & Badri Narayan RATH & Aruna Kumar DASH, 2016. "Supply Response of Milk Production: Analysis and Implications for BRIC Countries," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 16(1).
    2. Dennis Gaus & Heike Link, 2020. "Economic Effects of Transportation Infrastructure Quantity and Quality: A Study of German Counties," Discussion Papers of DIW Berlin 1848, DIW Berlin, German Institute for Economic Research.

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