Simultaneous Equations Models Quiz

Simultaneous Equations Models

• In simultaneous equations models, the dependent variables are functions of other dependent variables, explanatory variables, and error terms.

Challenges of Estimation

• Simultaneity poses challenges for the estimation of statistical parameters due to the violation of the assumption of independence between the dependent variable and the error term.

Typical Example

• A typical example of a simultaneous equations model in economics is the supply and demand model, where the quantity supplied and the quantity demanded are simultaneously determined.

Estimation Difficulties

• It is difficult to estimate all simultaneous equations at once because the equations are interdependent, and changes in one equation affect the others.

Joint Determination

• When some explanatory variables are jointly determined with the dependent variable in simultaneous equations models, it means that the explanatory variables are endogenous, i.e., they are affected by the dependent variable.