Simultaneous Equation Models class notes by Prof. Vinod all rights reserved. Marshallian Demand Supply . No equilibrium unless we consider both equations. Estimate simultaneously Two equation macro equilibrium. MPC overestimated even asymptotically T
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Y=X+V (rank and order conditions)
B 1= split them in 3 parts and derive
21 =211 Note small and big are different, conformable matrix multiplication is involved. Star means excluded variable, but we need to keep them with zero coefficients to do the algebra.
Rank of 21 =min(K1*, m1) has to be > m1, i.e. we must exclude enough variables (rainfall absent in Demand eq. Is order condition)
y3=f(y1,y2,x), y4=f(y1,y2,y3,x). OLS is OK on one equation at a time (this is called limited information estimation)