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Unformatted text preview: TWOSTAGE LEAST SQUARES w u x U p w + + + + = 4 3 2 1 1 In a second variation, we shall consider the model shown above. x is the rate of growth of productivity, assumed to be exogenous. w is now hypothesized to be a function of p , U , and x . For simplicity, p has reverted to being a simple function of w . p u w p + + = 2 1 w u x U p w + + + + = 4 3 2 1 2 2 2 2 4 2 3 2 1 1 1  + + + + + = w p u u x U p 2 2 2 4 3 1 2 1 1  + + + + + = w p u u x U w p u w p + + = 2 1 2 The reduced form equations are now as shown. The equation for w is underidentified because there is no exogenous variable to act as an instrument for p . Both U and x are already in the equation in their own right and are therefore unavailable. TWOSTAGE LEAST SQUARES w u x U p w + + + + = 4 3 2 1 2 2 2 2 4 2 3 2 1 1 1  + + + + + = w p u u x U p 2 2 2 4 3 1 2 1 1  + + + + + = w p u u x U w p u w p + + = 2 1 3 However, the equation for p is now overidentified. An equation is said to be overidentified if the number of available instruments exceeds the number of endogenous explanatory variables used as explanatory variables. TWOSTAGE LEAST SQUARES w u x U p w + + + + = 4 3 2 1 2 2 2 2 4 2 3 2 1 1 1  + + + + + = w p u u x U p 2 2 2 4 3 1 2 1 1  + + + + + = w p u u x U w p u w p + + = 2 1 4 We could use U as an instrument. TWOSTAGE LEAST SQUARES w u x U p w + + + + = 4 3 2 1 2 2 2 2 4 2 3 2 1 1 1  + + + + + = w p u u x U p 2 2 2 4 3 1 2 1 1  + + + + + = w p u u x U w p u w p + + = 2 1...
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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.
 Spring '10
 öcal
 Econometrics

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