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Re: st: re: How to correct standard errors of a 2sls performed by

From   John Antonakis <>
Subject   Re: st: re: How to correct standard errors of a 2sls performed by
Date   Sat, 06 Feb 2010 16:06:43 +0100

Hi Kit:

One difference is that x1 is entirely dependent on endogenous variables; so my naive question here is: which predicted values of x1 and x2 are included in Eq. 2 and 3 respectively (also knowing that x1 and x2 predict each other and that x1 has no unique instruments that predict it directly)?



Prof. John Antonakis, Associate Dean Faculty of Business and Economics
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On 06.02.2010 14:47, Kit Baum wrote:
John writes how does one do single-equation estimation with in the context of a non-recursive system. Again, here is the example:

Eq1: y = x1 + x2 + z
Eq2: x1 = m1 + m2 + x2 + z
Eq3: x2 = n1 + n2 + x1 + z
Eq4: m1 = q1 + q2 + z
Eq5: m2 = p1 + p2 + z

The predicted value of x2 enters in Eq. 2; however, the predicted value of x1 enters in Eq. 3. So, how does one go about estimating this non-recursive model using a single-equation estimator?

In the textbook example used to motivate 2SLS, we write down a demand equation and a supply equation, both of which contain Q and P along with demand shifters and supply shifters. How is that different from eq2-3?

Q = b0 + b1 P + b2 Y + e
P = g0 + g1 Q + g2 R + g3 T + v

with Y=income, R=rainfall, T=temperature.

Those who developed IV / 2SLS were able to consistently estimate these equations by limited-information (single-equation)  before systems estimators were devised. For that matter LIML could be used to estimate these equations as well (in either -ivregress- or -ivreg2- from SSC).

Kit Baum   |   Boston College Economics & DIW Berlin   |
                              An Introduction to Stata Programming  |
   An Introduction to Modern Econometrics Using Stata  |

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