14 Simultaneous Equations, SUR and Vector Autoregressions

Economic variables are usually determined jointly, and many questions concern a system of equations rather than one: supply and demand, consumption and income, wages and prices, the several components of a demand system. This section treats systems in three ways. Structural simultaneous equations models, the founding problem of econometrics at the Cowles Commission, raise the question of identification. Seemingly unrelated regressions exploit correlation between the disturbances of equations that are otherwise separate. And vector autoregressions, introduced by Sims (1980) as an alternative to structural models, treat every variable as endogenous and let the data speak; with cointegrated variables they become vector error correction models, and Johansen’s method tests for the number of cointegrating relations.

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