Solution to the simultaneous equation bias:

In  the  preceding pages we  learnt  that  if  we  apply  OLS  to  an  equation belonging to a system of simultaneous equations we would not get unbiased and consistent estimates. In order to obtain unbiased and consistent estimates we  apply  other methods  of  estimation. There  are  several methods  for  this  purpose. The most common are:

1)  Reduced form method, or indirect least squares'(ILS)

2)  The method of instrumental variables (IV)

3)  Two-stage least squares (2SLS)

4)  Limited information maximum likelihood (LIML)

5)  The mixed estimation method

6)  Three stage least squares (3SLS)

7)  Full information maximum likelihood (FIML)