Simultaneous equation models Assignment Help

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Simultaneous equation models:

The  econometric models we studied so  far  talk about  single equation regression models where a dependent variable is related to a set of independent or explanatory variables. In all these regression models, y is  the 'dependent'  or 'explained' variable arid  x1, x2,.... are the  'independent'  or  'explanatory' variables. Thus y depends upon x, but the reverse is not true. In real life, however, we normally find variables that are dependent on each other.  In this sort of relationship  the equilibrium values of the variables can be determined by considering  the simultaneity in relationship.

In  simultaneous relationships a single equation under investigation is part of a wider phenomenon. In  such cases the variables can be explained with the help of a system of equations. Let us take an example. At the macro level, as you know from macroeconomics course, aggregate consumption expenditure epends upon aggregate disposable income. Aggregate  disposable  income, on the other  hand, depends upon the national income and taws  imposed by  the government. Moreover, national income is dependent on aggregate  consumption expenditure of the economy.

Thus estimation of a single equation between aggregate consumption and disposable income will not provide us with consistent and  unbiased estimators.  

Unlike the single equation model, in simultaneous equation  ilodels we get more than one dependent, or endogenous variables. This endogenes variable may  appear in one equation as endogenous and as exogenous in  another equation of tne  system. Due to presence of the endogenous variables as explanatory variable in some of the equations it becomes correlated with the disturbance  term of the equatioh in which  it appears as  the explanatory variable.

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