ABSTRACT

A simultaneous equation model is supposed to operate by the solution of equations in the endogenous variables, for given values of the predetermined variables. Any linear simultaneous model can be expressed in a similar way, to give what is known as the reduced form. A single structural equation in a simultaneous model may have more than one endogenous variable on the right hand side. Each of these right hand side endogenous variables has to be replaced by a corresponding variable, the values of which are the predictions from the relevant reduced form regression. The estimation phase of the model building process may involve several stages of testing and revision, but the end product will be a set of equations in which the unknown parameter values are replaced by estimates. In the context of the national economy, one might think of variables for which values are determined by policy decision or for which values are 'imported' from abroad.