C9D3 - 1 INSTRUMENTAL VARIABLE ESTIMATION: VARIATION We...

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Unformatted text preview: 1 INSTRUMENTAL VARIABLE ESTIMATION: VARIATION We will continue with a variation on the basic model. We will now hypothesize that p is a function of m , the rate of growth of the money supply, as well as w . p u m w p + + + = 3 2 1 β β β w u U p w + + + = 3 2 1 α α α p u m w p + + + = 3 2 1 β β β w u U p w + + + = 3 2 1 α α α 2 An increase in the money supply is likely to increase price inflation and hence we would anticipate β 3 > 0. INSTRUMENTAL VARIABLE ESTIMATION: VARIATION p u m w p + + + = 3 2 1 β β β w u U p w + + + = 3 2 1 α α α 3 The reduced form equations are now as shown. Again, we see that we would obtain inconsistent estimates if we used OLS to fit the structural equations. 2 2 2 3 2 3 2 1 1 1 β α β β β α β α β- + + + + + = w p u u m U p 2 2 2 3 2 3 1 2 1 1 β α α β α α β α α- + + + + + = w p u u m U w INSTRUMENTAL VARIABLE ESTIMATION: VARIATION p u m w p + + + = 3 2 1 β β β w u U p w + + + = 3 2 1 α α α 2 2 2 3 2 3 2 1 1 1 β α β β β α...
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This note was uploaded on 05/26/2010 for the course ECON 301 taught by Professor Öcal during the Spring '10 term at Middle East Technical University.

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C9D3 - 1 INSTRUMENTAL VARIABLE ESTIMATION: VARIATION We...

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