problem 1: What is simultaneous biases? Discuss the cause of ednoginity in the regression analysis.
problem 2: Describely precisely what is meant by ‘the identification problem’ in the context of linear simultaneous equation model.
a) Consider the identifiability of each of the equations in the given model (use rank and order conditions):
where: C(consumption), I(investment), T (taxation), Y(income) are endogenous variables; G(government expenditure) is exogenous; U, V and W are random disturbance terms.
b) What problems occur in the interpretation of the coefficient estimates of equations which are not identified?
c) Why do simultaneous equations violate the classical supposition of independence among the error term and the explanatory variables?
d) What occurs if OLS is employed to estimate the coefficients of the simultaneous system?
e) What is Two-Stage Least Squares? What are the main properties of the Two-Stage Least Squares?