Where Form 8655 Reduced 2024

In this lecture, I will be talking about simultaneous equation models. Simultaneous models are very peculiar to econometrics. This is because the cause and effect relationships that we have in usual regression models do not always hold in the case of some econometric problems. Very often, what happens is that some of the variables, which may be the cause variable in one equation, might turn out to be an effect variable in another equation. So, unlike in Natural Sciences where causes and effects are very well defined, economics and social science models generally have difficulty in identifying which is the cause and which is the effect. Hence, what we require is to treat the different variables together in a set of equations known as simultaneous equation models. What we will do in today's lecture is give you an idea of what simultaneous equation model says and also tell you why we require these models. While simultaneous equation models, let us look at regression models. Suppose we have T plus 1 variables and we want to set up a regression model using these T plus 1 variables. Among these variables, we identify one variable Y as the response variable or the dependent variable and use the other P variables X1, X2, ..., XP as a set of explanatory variables which would explain what Y is. So, usually, the X1, X2, ..., XP are assumed fixed, that is, they are known beforehand and they influence the Y variable. Now, if you look at this, what we talk about here is that X1, X2, ..., XP is a set of independent variables. These are referred to as the cause variables and they affect the Y variable, which is the effect variable. So, we have a unidirectional cause-effect relationship in this case and in...