University of Zimbabwe
Economics Dept
Econ313: Econometrics II @ 2015
Chapter 2: Simultaneous Equations Computer exercises
In this chapter:
1.Generating time series for taxes and net exports using structural
2.Estimating CO with least squares (
3.Estimating two-stage least squares regression using EViews TSLS method
4.Estimating two-stage least squares regression using two distinct stages and OLS
5.Comparing the OLS, EViews TSLS, and OLS two-stage models
6.The identification problem and the order condition )
7.Exercises
The naïve Keynesian macroeconomic model of the U.S. economy identified will be used to demonstrate the two stage-least squares procedure. The data for this
model is found in the EViews workfile named macro14.wf1 downloadable on Tsime. Two variables that are included in the macroeconomic model must be
generated from other data series.
Generating time series for taxes and net exports using structural equations:
Follow these steps to generate time series values for T (taxes) and NX (net exports) using the structural equations in the mo del:
Step 1. Open the EViews workfile named Macro14.wf1.
Step 2. To generate a new series named T for taxes, select Genr on the workfile menu bar, typeT=Y- YD in the Enter equation: window, and click OK. A
new series icon for T is created in the workfile window.
Step 3. To generate a new series named NX for net exports, select Genr on the workfile menu bar, type NX=Y-CO-I-G in the Enter equation: window, and
click OK. A new series icon for NX is created in the workfile window.
Step 4. Select Save on the workfile menu bar to save your changes.
Estimating CO with least squares
Step 1. Open the EViews workfile named Macro14.wf1.
Step 2. Select Objects/New Object/Equation on the workfile menu bar, enter CO C YD CO(-1)in the Equation Specification: window, and click OK to
reveal the regression output to the right.
Step 3. Select Name on the equation window menu bar, enter OLS_CO in the Name to identify object: window, and click OK.
Step 4. Select Save on the workfile menu bar to save your changes.
Estimating two-stage least squares regression using EViews TSLS method:
To estimate the two-stage least squares model, follow these steps:
Step 1. Open the EViews workfile named Macro14.wf1.
1
Step 2. Select Objects/New Object/Equation on the workfile menu bar, and select TSLS – Two-Stage Least Squares (TSNLS and ARMA) in the
Method: window under Estimation Settings: and the dialog will change to include an Instrument list: window (see graphic on the right).
Step 3. Enter CO C YD CO(-1) in the Equation Specification: window and C G T NX CO(-1) R(-1) in the Instrument list:window. The graphic above shows
the relevant selections/entries highlighted in yellow. Click OK to reveal the Estimation Output view printed below. The yellow highlighted portions
of the regression output reflect the selections made in the dialog window shown above.
Dependent Variable: CO
Method: Two-Stage LeastSquares
Date: 12/10/15 Time: 15:12
Sample(adjusted): 1964 1994
Included observations: 31 after adjusting endpoints
Instrument list: C G T NX CO(-1)R(-1)
Variable Coefficient Std. Error t-Statistic Prob.
C -24.73014 34.90233 -0.708553 0.4845
YD 0.441638 0.153839 2.870773 0.0077
CO(- 1) 0.540309 0.163000 3.314782 0.0025
R-squared 0.997890 Mean dependent var 2445.210
Adjusted R-squared 0.997739 S.D. dependent var 642.2594
S.E. of regression 30.53734 Sum squared resid 26110.82
F-statistic 6615.725 Durbin-Watsonstat 0.982576
Prob(F-statistic) 0.000000
Step 4. Select Name on the equation window menu bar, enter TSLS_CO in the Name to identify object: window, and click OK.
Step 5. Select Save on the workfile menu bar to save your changes.
Estimating two-stage least squares regression using two distinct stages and OLS:
To estimate the two-stage least squares equation using ordinary OLS and two distinct phases, follow these steps:
Step 1. Open the EViews workfile named Macro14.wf1.
Step 2. To estimate the reduced form equation for YD select Objects/New Object/Equation on the workfile menu bar, enter YD C G NX T
CO(-1) R(-1) in the Equation Specification: window, and click OK.
Step 3. To generate the forecast values from this equation, select Forecast on the equation menu bar, enter YDF in the Forecast name: window,
and click OK. EViews will create a new variable in the workfile named YDF.
Step 4. To estimate the second stage equation for CO select Objects/New Object/Equation on the workfile menu bar, enter CO C YDF
CO(-1) in the Equation Specification: window, and click OK. Note that we have used the instrumental variable YDF instead of the actual
variable YD for disposable income. The method, dependent variable, and variable names are highlighted in yellow in the OLS regression
output shown below.
Step 5. Select Name on the equation window menu bar, enter TSLS_OLS_CO in the Name to identify object: window, and. Click OK.
Step 6. Select Save on the workfile menu bar to save your changes.
Dependent Variable: CO
Method: Least Squares
Date: 12/10/15 Time: 15:44
Sample(adjusted): 1964 1994
Included observations: 31 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
C -24.73014 41.09577 -0.601769 0.5522
YDF 0.441638 0.181138 2.438126 0.0214
CO(-1) 0.540309 0.191924 2.815219 0.0088
R-squared 0.997075Mean dependent var 2445.210
Adjusted R-squared 0.996866S.D. dependent var 642.2594
S.E. of regression 35.95622Akaike info criterion 10.09425
Sum squared resid 36199.78Schwarz criterion 10.23302
Log likelihood -153.4608F-statistic 4771.906
Durbin-Watsonstat 1.485932Prob(F-statistic) 0.000000
Comparing the OLS, EViews TSLS, and OLS two-stage models:
- To compare the coefficients, std. Errors, and t-statistics for the three models discussed in this chapter, open the equations named
OLS_CO,TSLS_CO andTSLS_OLS_CO, by double clicking their respective icons in the workfile window, and compare the regression
output.
- To facilitate the process, the output for the OLS, EViews TSLS and OLS TSLS models are printed in this guide. Look at all three and
compare the data printed in the red-boxed area for each regression.
- Note that the estimated coefficients are larger in the OLS_CO model compared to the TSLS_CO and TSLS_OLS_CO models. This
supports the hypothesis that OLS estimates of coefficients have a positive bias in simultaneous equation models (simultaneity bias).
- Contrarily, TSLS estimated coefficients tend to have a downward bias.
- Note that the estimated coefficients are identical for the TSLS_CO and TSLS_OLS_CO models, but the standard errors (Std. Error in the
EViews output) are smaller in the EViews TSLS estimated model, making the coefficients more significant (i.e., higher t-statistics).
- In order to get accurate estimates of standard errors and t- scores, the estimation should be done on a complete two-stage least squares
program (like EViews TSLS). When OLS is used to estimate the second stage, it ignores the fact that the first stage was run a t all,
The identification problem and the order condition:
- In order to calculate two-stage least squares using theTSLS – Two-Stage Least Squares (TSNLS and ARMA) option, your specification
must satisfy the order condition for identification, which states that there must be at least as many instru ments as there are coefficients in
your equation.
- The order condition for identification is easy to assess in EViews. Count, to make sure that the number of independent variables, not
counting the constant, in the Equation Specification: window (i.e.,YD & CO(-1) ) is less than or equal to the number of predetermined
variables in the Instrument list: window (i.e.,G, T, NX, CO(-1) & R(-1)).See graphic in the Two-stage least squares regression using
EViews TSLS method section above.
Exercises:
To be uploaded after lab session
