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sttnm rozpotem R a rozpotem hlavnho msta Prahy. Praha & EU: Investujeme do va budoucnosti
Department of Economics
Subject: Econometrics
7th LESSON:
Simultaneous equations models
2012
Introduction
In this document you can found the examples which are related with 7th econometric lesson.
The content is shown below. Every subchapter has one example which is solved. Other
exercises are for practising, solution is in the end of the document.
Content
1 IDENTIFICATION OF THE MODEL ........................................................................................... 2
1
1 Identification of the Model
Example 1
Identify following model:
y1t = 11x1t + 13x3t + 14x4t + u1t
y2t = 21y1t + 21x1t + 22x2t-1 + 23x3t + 24x4t + u2t
y3t = y1t + y2t
Solution
Number of predetermined variables, which are in the whole model: k = 4
Namely: x1t, x2t-1, x3t, x4t
1st equation:
Number of predetermined variables, which are in the equation: k* = 3
Namely: x1t, x3t, x4t
2nd equation:
Number of predetermined variables, which are in the equation: k* = 4
Namely: x1t, x2t-1, x3t, x4t
2
Number of endogenous variables, which are in the equation minus one: g 1 = 1
3rd equation:
Third equation is an identity equation, because it has known parameters (which are equal to
one) and the equation has not a stochastic variable (ut).
Every identity equation is automatically considered as identified; therefore we dont identify
this equation.
Conclusion:
The model is not identified, because one equation is under-identified.
Example 2
Use the model from Example 1, i.e.:
y1t = 11x1t + 13x3t + 14x4t + u1t
y2t = 21y1t + 21x1t + 22x2t-1 + 23x3t + 24x4t + u2t
y3t = y1t + y2t
Solution
1st equation previous situation
Number of predetermined variables, which are NOT in the equation: k** = 1
Number of endogenous variables, which are in the equation minus one: g 1 = 0
Condition of identification in this case is: 1 > 0.
The first equation is over-identified.
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2nd equation previous situation
Number of predetermined variables, which are NOT in the equation: k** = 0
Number of endogenous variables, which are in the equation minus one: g 1 = 1
Condition of identification in this case is: 0 < 1.
The second equation is under-identified.
Practising Exercises
Exercise 1:
Identify following model:
y1t = 12y2t + 11x1t + 14x4t + u1t
y2t = 21y1t + 21x1t + 23x3t + *22y2t-1 + u2t
y3t = y1t + y2t + x2t
Exercise 2:
Identify following model:
y1t = 12y2t + 11x1t + 12x2t + 13x3t-1 + 15x5t + 16x6t + u1t
y2t = 21x1t + 22x2t + 23x3t-1 + *22y2t-1 + u2t
y3t = 31y1t + 32y2t + 31x1t + 36x6t + u3t
Exercise 3:
Identify following model:
y1t = 13y3t + 11x1t + 13x3t + 14x4t + u1t
y2t = 21y1t + 21x1t + 22x2t-1 + 23x3t + 24x4t + u2t
y3t = 31x1t + 32x2t-1 + u3t
4
Exercise 4:
Identify following model:
y1t = *11y1t-1 + 11x1t + 12x2t + 19x9t + u1t
y2t = 21y1t + 21x1t + 23x3t-1 + 28x8t + 29x9t + u2t
y3t = 31y1t + 32y2t + 31x1t + 33x3t-1 + u3t
y4t = y1t + y2t y3t
Exercise 5:
Identify following model:
y1t = 20 + 8x1t 4x2t + 12x3t + u1t
y2t = 14 3y1t + 11x2t 5x4t-1 + u2t
y3t = 5 7,5y1t-1 + 7y2t + 6x1t 12x2t + 15x3t + u3t
Solution
y1t y2t y3t x1t x2t-1 x3t x4t
1 0 0 11 0 13 14
= 21 1 0 = 21 22 23 24
1 1 1 0 0 0 0
5
Practising Exercises
Exercise 1:
Create matrices and of the following model:
y1t = 12y2t + 11x1t + 14x4t + u1t
y2t = 21y1t + 21x1t + 23x3t + *22y2t-1 + u2t
y3t = y1t + y2t + x2t
Exercise 2:
Create matrices and of the following model:
y1t = 12y2t + 11x1t + 12x2t + 13x3t-1 + 15x5t + 16x6t + u1t
y2t = 21x1t + 22x2t + 23x3t-1 + 24y2t-1 + u2t
y3t = 31y1t + 32y2t + 31x1t + 36x6t + u3t
Exercise 3:
Create matrices and of the following model:
y1t = 13y3t + 11x1t + 13x3t + 14x4t + u1t
y2t = 21y1t + 21x1t + 22x2t-1 + 23x3t + 24x4t + u2t
y3t = 31x1t + 32x2t-1 + u3t
Exercise 4:
Create matrices and of the following model:
y1t = *11y1t-1 + 11x1t + 12x2t + 19x9t + u1t
y2t = 21y1t + 21x1t + 23x3t-1 + 28x8t + 29x9t + u2t
y3t = 31y1t + 32y2t + 31x1t + 33x3t-1 + u3t
y4t = y1t + y2t y3t
Exercise 5:
Create matrices and of the following model:
y1t = 20 + 8x1t 4x2t + 12x3t + u1t
y2t = 14 3y1t + 11x2t 5x4t-1 + u2t
y3t = 5 7.5y1t-1 + 7y2t + 6x1t 12x2t + 15x3t + u3t
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3 Reduced Form of a Model
Example
Compute reduced form of the following model.
y1t = 4 x2t + 3x4t-1 + u1t
y2t = 8 2y1t 2x3t x4t-1 + u2t
y3t = 2 + y2t + 3x3t 9x4t-1 + u3t
Solution
Firstly we create matrices and .
y1t y2t y3t x1t x2t x3t x4t-1
1 0 0 4 1 0 3
= 2 1 0 = 8 0 2 1
0 1 1 2 0 3 9
Secondly we compute reduced form by using matrix calculation. The formula is follows:
= 1
1 0 0 1 0 0 1 0 0
a) = 2 1 0 b) = 2 1 0
1
c) = 2 1 0
1
0 1 1 2 1 1 2 1 1
1 0 0 4 1 0 3 4 1 0 3
1
d) = = 2 1 0 8 0 2 1 = 0 2 2 7
2 1 1 2 0 3 9 2 2 1 16
7
Practising Exercises
Exercise 1:
Create matrices and of the following model and compute reduced form. Use matrix
calculation.
y1t = 3y2t + 6 + 3x2t-1 + u1t
y2t = y1t + 2 5x3t x4t + u2t
y3t = 2y2t 1 2x2t-1 + x3t + u3t
Exercise 2:
Create matrices and of the following model and compute reduced form. Use matrix
calculation.
y1t = 2y2t + 10 3x2t y2t-1 + u1t
y2t = 3y1t y3t + 5 + 4x3t + u2t
y3t = y1t + y2t + x2t
Exercise 3:
Create matrices and of the following model and compute reduced form. Use matrix
calculation.
y1t = 3x1t 2x3t-1 + 2x4t + u1t
y2t = 3y1t + 8y2t-1 + 5y3t 5x1t 2x2t + 4x4t + u2t
y3t = y1t + y2t + 8x3t
Exercise 4:
Compute reduced form of the following model. Use matrix calculation and a substitution.
Compute also values of error terms of reduced form using ut.
y1t = 3y2t + 8 + 10x2t 7x4t + u1t
y2t = 2y1t 5 15x3t 4x4t + u2t
8
4 Results of practising exercises
1 Identification of the model
Exercise 1
Whole model:
k=5 Namely: x1t, x2t, x3t, x4t, y2t-1
We cant forget x2t in the identity equation
g=3 Namely: y1t, y2t, y3t
1st equation:
k* = 2 Namely: x1t, x4t
k** = 3 Namely: x2t, x3t, y2t-1
g = 2 Namely: y1t, y2t
g 1 = 1
2nd equation:
k* = 3 Namely: x1t, x3t, y2t-1
k** = 2 Namely: x2t, x4t
g = 2 Namely: y1t, y2t
g 1 = 1
3rd equation:
This equation is an identity equation identified equation
Exercise 2
Whole model:
k = 6 Namely: x1t, x2t, x3t-1, x5t, x6t, y2t-1
g = 3 Namely: y1t, y2t, y3t
1st equation:
k* = 5 Namely: x1t, x2t, x3t-1, x5t, x6t,
k** = 1 Namely: y2t-1
g = 2 Namely: y1t, y2t
g 1 = 1
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2nd equation:
k* = 4 Namely: x1t, x2t, x3t-1, y2t-1
k** = 2 Namely: x5t, x6t,
g = 1 Namely: y2t
g 1 = 0
3rd equation:
k* = 2 Namely: x1t, x6t
k** = 4 Namely: x2t, x3t-1, x5t, y2t-1
g = 3 Namely: y1t, y2t, y3t
g 1 = 2
Exercise 3
Whole model:
k=4 Namely: x1t, x2t-1, x3t, x4t
g=3 Namely: y1t, y2t, y3t
1st equation:
k* = 3 Namely: x1t, x3t, x4t
k** = 1 Namely: x2t-1
g = 2 Namely: y1t, y3t
g 1 = 1
2nd equation:
k* = 4 Namely: x1t, x2t-1, x3t, x4t
k** = 0
g = 2 Namely: y1t, y2t
g 1 = 1
3rd equation:
k* = 2 Namely: x1t, x2t-1
k** = 2 Namely: x3t, x4t
g = 1 Namely: y3t
g 1 = 0
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Exercise 4
Whole model:
k=6 Namely: x1t, x2t, x3t-1, x8t, x9t, y1t-1
g=4 Namely: y1t, y2t, y3t, y4t
1st equation:
k* = 4 Namely: y1t-1, x1t, x2t, x9t,
k** = 2 Namely: x3t-1, x8t,
g = 1 Namely: y1t
g 1 = 0
2nd equation
k* = 4 Namely: x1t, x3t-1, x8t, x9t
k** = 2 Namely: x2t, y1t-1
g = 2 Namely: y1t, y2t
g 1 = 1
3rd equation
k* = 2 Namely: x1t, x3t-1
k** = 4 Namely: x2t, x8t, x9t, y1t-1
g = 3 Namely: y1t, y2t, y3t
g 1 = 2
4th equation
This equation is an identity equation identified equation
Exercise 5
Whole model:
k=6 Namely: x1t, x2t, x3t, x4t-1, y1t-1, constant term = x0t
Dont forget constant term, which is represented by numbers: 20, 14, 5 in equations
g=3 Namely: y1t, y2t, y3t
1st equation:
k* = 4 Namely: x0t, x1t, x2t, x3t,
k** = 2 Namely: x4t-1, y1t-1
g = 1 Namely: y1t
g 1 = 0
Result: 2 > 0 over-identified equation
11
2nd equation
k* = 3 Namely: x0t, x2t, x4t-1
k** = 3 Namely: x1t, x3t, y1t-1
g = 2 Namely: y1t, y2t
g 1 = 1
3rd equation
k* = 5 Namely: x0t, y1t-1, x1t, x2t, x3t
k** = 1 Namely: x4t-1,
g = 2 Namely: y2t, y3t
g 1 = 1
Exercise 2
y1t y2t y3t x1t x2t x3t-1 y2t-1 x5t x6t
1 12 0 11 12 13 0 15 16
= 0 1 0
= 21 22 23 24 0 0
31 32 1 31 0 0 0 0 36
Exercise 3
y1t y2t y3t x1t x2t-1 x3t x4t
1 0 13 11 0 13 14
= 21 1 0
= 21 22 23 24
0 0 1 31 32 0 0
12
Exercise 4
y1t y2t y3t y4t x1t x2t x3t-1 x8t x9t y1t-1
1 0 0 0 11 12 0 0 19 11*
1 0 0 0 0
= 21 = 21 23 28 29
31 32 1 0 31 0 33 0 0 0
1 1 1 1 0 0 0 0 0 0
Exercise 5
y1t y2t y3t const.term y1t-1 x1t x2t x3t x4t-1
1 0 0 20 0 8 4 12 0
= 3 1 0 = 14 0 0 11 0 5
0 7 1 5 7,5 6 12 15 0
Matrices and :
y1t y2t y3t const.term x2t-1 x3t x4t
1 3 0 6 3 0 0
= 1 1 0 = 2 0 5 1
0 2 1 1 2 1 0
Matrix :
const.term x2t-1 x3t x4t
6 1.5 7.5 1.5
M = 4 1.5 2.5 0.5
7 1 4 1
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Exercise 2
Matrices and :
y1 y2t y3t const.term x2t x3t y2t-1
1 2 0 10 3 0 1
= 3 1 1 = 5 0 4 0
1 1 1 0 1 0 0
Matrix :
const.term x2t x3t y2t-1
3 0,8 0.8 0.2
= 3,5 1.1 0.4 0.4
0,5 1.3 1.2 0.2
Exercise 3
Matrices and :
y1t y2t y3t x1t x2t x3t-1 x4t y2t-2
1 0 0 3 0 2 2 0
= 3 1 5 = 5 2 0 4 8
1 1 1 0 0 8 0 0
Matrix :
x1t x2t x3t-1 x4t y2t-2
3 0 2 2 0
M = 4.75 0.5 6 5 2
1.75 0.5 0 3 2
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Exercise 4
a) Substitution:
First step of substitution:
y1t = 3*[2y1t 5 15x3t 4x4t + u2t] + 8 + 10x2t 7x4t + u1t
y2t = 2*[3y2t + 8 + 10x2t 7x4t + u1t] 5 15x3t 4x4t + u2t
etc.
b) Matrix calculation
Matrices and :
y1t y2t const.term x2t x3t x4t
1 3 8 10 0 7
= =
2 1 5 0 15 4
Matrix :
const.term x2t x3t x4t
1. 4 2 9 3 .8
=
2. 2 4 3 3.6
Reduced form:
y1t = 1.4 2x2t + 9x3t + 3,8x4t + v1t
y2t = 2.2 4x2t + 3x3t + 3.6x4t + v2t
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Now we have to compute the value of random variables of reduced form vit.
1
Formula: vt = u t
v 0 .2 0 .6 u
vt = 1t 1 = u t = 1t
v 2 t 0 .4 0 .2 u 2t
Author:
Ing. Petra Bubkov, CULS, FEM, Department of Economics
Note:
This material has not undergone editorial or language editing. If you found some mistakes,
dont hesitate to contact me by email: bubakova@pef.czu.cz
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