Simultaneous Equations Models SEM Chapter 16 - PowerPoint PPT Presentation

1 / 9
About This Presentation
Title:

Simultaneous Equations Models SEM Chapter 16

Description:

Murder Rates and Police Force. Reactions of potential murderers. murdpc= a1polpc 10 11income u1 ... The author construct a model to forecast the Treasury ... – PowerPoint PPT presentation

Number of Views:326
Avg rating:3.0/5.0
Slides: 10
Provided by: economicsa
Category:

less

Transcript and Presenter's Notes

Title: Simultaneous Equations Models SEM Chapter 16


1
Simultaneous Equations Models (SEM) (Chapter 16)
  • Course Applied Econometrics
  • Lecturer Zhigang Li

2
Simultaneity
  • Simultaneity is an important source of
    endogeneity
  • Simultaneity arises when some explanatory
    variables are jointly determined with the
    dependent variable.
  • These explanatory variables are generally
    endogenous.
  • A Simultaneous Equation Model (SEM) explicitly
    models all those endogenous variables that are
    jointly determined.
  • A correctly formed SEM is very useful because it
    could suggest instrumental variables to solve the
    simultaneity problem.

3
A Classical Example of SEM
  • Supply and demand for some product
  • Labor Supply
  • hsa1wß1z1u1
  • Higher wage w, higher supply of labor. This is a
    positive causal effect on employees.
  • Labor Demand
  • hda2wß2z2u2
  • Higher wage w, lower demand for labor. This is a
    negative causal effect on employers.
  • Wage w is endogenous in equilibrium. Both zs are
    exogenous.

4
IV
  • OLS regression of h on w can not identify either
    the causal effect on employees or the causal
    effect on employers.
  • IV
  • If z1 and z2 are not the same, then z1 can be the
    IV for w in the demand equation while z2 can be
    the IV for w in the supply equation
  • 2SLS can be used to estimate the coefficients of
    w in demand and supply equations separately.
  • In general, you need at least as many IVs as
    endogenous variables for the IV method to work.

5
Two More SEM ExamplesOne Good, One Bad (p.
528-29)
  • Murder Rates and Police Force
  • Reactions of potential murderers
  • murdpc a1polpcß10ß11incomeu1
  • Decision of city officials
  • polpc a2murdpcß20u2
  • Can we identify the effect of police force on
    murderers using IV approach?
  • Housing Expenditures and Saving
  • housing a1savingß10ß11incomeu1
  • saving a2housingß20ß21incomeu2

6
The Effect of an Open-Market Operation on Federal
Funds Rate (Hamilton, 1997)
  • Bank reserves and federal funds rate are
    simultaneously determined.
  • Liquidity Effect The effects on banks
  • The Fed also chooses the supply of reserves each
    day based on the expected fed fund rate
  • The study suggests using errors the Fed makes in
    forecasting the Treasury balance as an
    instrument.
  • The errors induces changes in bank reserves but
    is exogenous to federal fund rates.
  • The errors are not made public. The author
    construct a model to forecast the Treasury
    balance and used the fitted residuals as a proxy.

7
Findings
  • A reduction in nonborrowed researves of 30
    million may cause the federal funds rate to rise
    by 10 basis points.

8
Does Trade Liberalization Harm the Environment?
(Dean, 2002)
  • Effect on Firms
  • ?Y aD?D aF?Fß(T)?d
  • Effect on environment
  • ?D ß(?p1-?p2-?T) aF?F
  • Only Y and D are endogenous
  • Using provincial data on Chinese water pollution,
    the study finds that income growth had
    significantly negative effect on pollution while
    the inverse effect is negligible.

9
Effect of Pollution Control on Pollution (Wang
and Wheeler, 2005)
  • Levy Equation
  • ELf(EMI, Waste, Local, Plant)
  • Emissions Equation
  • EMIf(EL, Other Policy, Cost, Ownership)
Write a Comment
User Comments (0)
About PowerShow.com