04 Var-1

16/10/2023
Vector Autoregressive Models (VAR)
Macroeconometrics
Prof. Freddy Espino
Macroeconometrics VAR 1
Readings
• Enders, Ch. 5
• Sims (1980) “Macroeconomics and Reality”, Econometrica, Vol. 48, No.
1., pp. 1-48.
• Stock and Watson (2001) “Vector Autoregressions”, Journal of
Economic Perspectives, Vol. 15, Number 4, Pages 101–115.
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1. Introduction
1. Introduction
• According to Sims (1980), if there is true simultaneity among a set of
variables, they should all be treated on an equal footing; there should
not be any a priori distinction between endogenous and exogenous
variables.
• In the two variables case, we can let the time path 𝑦 , be affected by
current and past realizations of 𝑦 , sequence and vice versa.
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2. Vector Autoregressive (VAR)
2.1 VAR
• Consider the simple bivariate model
1. 𝑦 , =𝛾 +𝑏 𝑦 +𝛾 𝑦 , +𝛾 𝑦 , +𝜀 ,
2. 𝑦 , =𝛾 +𝑏 𝑦 , +𝛾 𝑦 , +𝛾 𝑦 , +𝜀 ,
• Where it is assumed that
• (i) both 𝑦 , and 𝑦 , are stationary,
• (ii) 𝜀 s are white-noise disturbances with variance 𝜎 and 𝜎 ; and
• (iii) 𝜀 , and 𝜀 , are uncorrelated.
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2.1 VAR
• Equations (1) and (2) constitute a first-order vector autoregression
VAR(1), because it has 1 lag.
• Note that 𝜀 𝑠 are pure innovations (or shocks) in 𝑦 , and 𝑦 , .
• If 𝑏 (𝑏 ) is not equal to zero, 𝜀 , (𝜀 , ) has an indirect
contemporaneous effect on 𝑦 , (𝑦 , ).
2.1 VAR
• Using matrix algebra, we can write the system in the compact form:
1 𝑏 𝑦 , 𝛾 𝛾 𝛾 𝑦 , 𝜀 ,
3. 𝑦 = 𝛾 + 𝛾 𝛾 𝑦 + 𝜀
𝑏 1 , , ,
4. 𝐵𝑦 = Γ + Γ 𝑦 +𝜀
5. 𝑦 = 𝐴 + 𝐴 𝑦 +𝑢
• Notice 𝑢 = 𝐵 𝜀 ⇒ 𝜀 = 𝐵𝑢
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2.1 VAR
• Using the new notation, we can rewrite in the equivalent form:
6. 𝑦 , =𝑎 +𝑎 𝑦 , +𝑎 𝑦 , +𝑢 ,
7. 𝑦 , =𝑎 +𝑎 𝑦 , +𝑎 𝑦 , +𝑢 ,
• System (1) and (2) is called a structural VAR or the primitive system
and the system (7) and (6) is called a reduced VAR or in standard
form.
2.1 VAR
• Structural VAR:
1 𝑏 𝑦 , 𝛾 𝛾 𝛾 𝑦 , 𝜀 ,
𝑦 = 𝛾 + 𝛾 𝛾 𝑦 + 𝜀
𝑏 1 , , ,
𝜀 ,
𝜀 = 𝜀 ~𝑖𝑖𝑑 0, Σ
,
𝜎 0
Σ =
0 𝜎
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2.1 VAR
• Reduced or Standard VAR:
𝑦 , 𝑎 𝑎 𝑎 𝑦 , 𝑢 ,
𝑦 = 𝑎 + 𝑎 𝑎 𝑦 + 𝑢
, , ,
𝑢 ,
𝑢 = 𝑢 ~𝑖𝑖𝑑 0, Ω
,
𝜔 𝜔
Ω =
𝜔 𝜔
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2.1 VAR
• In general, consider a VAR in the standard form with p lags, VAR (p):
𝑦 =𝐴 +𝐴 𝑦 + ⋯+ 𝐴 𝑦 +𝑢
𝑦 = 𝐴 + 𝐴(𝐿) 𝑦 + 𝑢
𝜔 𝜔
𝑢 ~𝑖𝑖𝑑 0, Ω ; Ω =
𝜔 𝜔
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2.1 VAR
• 𝑢 , = (𝜀 , − 𝑏 𝜀 , )/(1 − 𝑏 𝑏 )
• 𝑢 , = (𝜀 , − 𝑏 𝜀 , )/(1 − 𝑏 𝑏 )
• 𝐸𝑢 , =𝐸 𝑢 , =0
• Var 𝑢 , 𝑎𝑛𝑑 Var 𝑢 , 𝑎𝑟𝑒 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡
• 𝐶𝑜𝑣 𝑢 , , 𝑢 , = 𝐶𝑜𝑣 𝑢 , , 𝑢 , = 0 for 𝑖 ≠ 0
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2.1 VAR
• The covariance of the two terms is not zero:
•𝐸𝑢,𝑢 , = −𝑏 𝜎 + 𝑏 𝜎 ⁄ 1− 𝑏 𝑏 =𝜎 =𝜎
• In the case that 𝑏 =𝑏 = 0 the shocks will be uncorrelated.
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3. Lag Selection
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3.1 Lag Selection
• In a VAR, long lengths quickly consume degrees of freedom.
• If lag length is 𝑝, each of the 𝐾 equations contains 𝐾 × 𝑝 coefficients
plus the intercept term: 𝑁 = 𝐾 + 𝐾 𝑝
• Appropriate lag-length selection can be critical.
• If p is to small, the model is misspecified;
• if p is too large, degrees of freedom are wasted.
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3.1 Lag Selection
• There are basically three methods that have been employed to
determine what p should be:
1. By using some theoretical model.
2. By using a rule of thumb.
3. By using statistical criteria that trade off fit against the number of
parameters fitted.
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3.1 Lag Selection
1. By using some theoretical model.
• For example, if one has a DSGE model of an economy in mind, one
would know what the potential set of variables to appear in a VAR
would be, as well as the likely order of it.
• Generally, if data is quarterly a VAR(2) would probably suffice.
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3.1 Lag Selection
2. By using a rule of thumb.
• Initially in practice one used to see people choosing p = 4 when
working with quarterly data and p = 6 with monthly data.
• Provided T is small these are probably upper limits to the likely
order.
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3.1 Lag Selection
3. By using statistical criteria:
• The idea of imposing a penalty for adding regressors to the model
has been carried further in the Akaike Information Criterion
(AIC) and Schwarz Information Criterion (SIC):
𝐴𝐼𝐶 = −2𝑙 ⁄𝑇 + 2𝑛⁄𝑇
𝑆𝐼𝐶 = −2𝑙 ⁄𝑇 + 𝑛 × 𝑙𝑜𝑔(𝑇)⁄𝑇
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3.2 Lag Selection: Lag Exclusion Tests
• Suppose we want to test ℓ against ℓ − 1 lags in a VAR system.
• The proper test for this cross-equation restriction is a Likelihood Ratio (LR):
• 𝐿𝑅 = (𝑇 − 𝑚) 𝑙𝑜𝑔 𝛴ℓ − log( 𝛴ℓ ) ~𝜒 (𝑞)
• 𝑇 is the number of usable observations
• 𝑚 is the number of parameters estimated in each equation of the unrestricted
model, in this case ℓ.
• 𝑞 = (#𝑈𝑛𝑟𝑒𝑠𝑡𝑟𝑖𝑐𝑡𝑒𝑑 − #𝑅𝑒𝑠𝑡𝑟𝑖𝑐𝑡𝑒𝑑) in terms of parameters.
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3.2 Lag Selection: Lag Exclusion Tests
• Under the Null that H0: 𝑝 = ℓ − 1 lags are appropriate, reestimate
the VAR over the same sample period using ℓ − 1 lags and obtain the
variance/covariance matrix of the residuals: 𝛴ℓ
• If the calculated value of the statistic is less than 𝜒 (𝑞) at a perspective
significance level (5%), we would not be able to reject H0.
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4. Stability and stationarity
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• The VAR
𝑦 = 𝐴 + 𝐴(𝐿) 𝑦 + 𝑢
• Can be written as:
[𝐼 − 𝐴 𝐿 ]𝑦 = 𝐴 + 𝑢
• Like in the ARIMA model, stability requires that the roots of 𝐼 − 𝐴 𝐿
lie outside the unit circle.
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• If we can abstract from an initial condition, the 𝑦 sequences will be
jointly covariance stationarity if the stability condition holds.
• Each sequence 𝑦 has a finite and time-invariant mean, and a finite
and time-invariant variance.
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5. Identification
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5. Identification
• Suppose that you want to recover the structural VAR from your
estimate of the model in standard form.
• Return to the two-variable/first-order VAR. Due to the feedback
inherent in the system, these equations cannot be estimated directly.
• The reason is that 𝑦 , is correlated with the error term 𝜀 , and 𝑦 ,
with the error term 𝜀 , .
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5. Identification
• Standard estimation techniques require that the regressors be
uncorrelated with the error term.
• Note there is no such problem in estimating the VAR system in the
standard form [i.e., in the form 6 and 7]
• OLS can provide estimates of the two elements of A’s.
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5. Identification
• The issue is whether it is possible to recover all the information present
in the primitive system from the estimated system.
• Is the primitive form identifiable given the OLS estimates of the VAR
model in the form of 6 and 7?
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5. Identification
• The answer to this question is “No, unless we are willing to
appropriately restrict the primitive system”
• The reason is clear if we compare the number of parameters in the
structural VAR with the number of parameters recovered from the
standard form VAR model.
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5. Identification
• The primitive form has 10 parameters: 2𝑏, 6𝛾, 𝜎 and 𝜎 .
• The standard form calculates 9 parameters: 6𝑎, 𝜔 , 𝜔 and 𝜔 =𝜔
• Thus, unless one is willing to restrict one of the parameters, it is not
possible to identify the primitive system.
• One way to identify the model is to use the type of recursive system
proposed by Sims (1980).
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5. Identification
• Suppose that you are willing to impose a restriction on the primitive system
such that the coefficient 𝑏 equals zero:
1. 𝑦 , =𝑏 +𝑏 𝑦 +𝛾 𝑦 , +𝛾 𝑦 , +𝜀 ,
2. 𝑦 , =𝑏 + (0)𝑦 , +𝛾 𝑦 , +𝛾 𝑦 , +𝜀 ,
• Imposing the restriction 𝑏 = 0 means that B-1:
1 𝑏 1 −𝑏
• 𝐵= ⇒𝐵 =
0 1 0 1
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5. Identification
• Which will produce:
1 𝑏 𝑦 , 𝑏 𝛾 𝛾 𝑦 , 𝜀 ,
𝑦 = + 𝛾 𝛾 𝑦 + 𝜀
0 1 , 𝑏 , ,
• Pre multiplying by B-1:
𝑢 =𝐵 𝜀
𝑢 1 −𝑏 𝜀
𝑢 = 𝜀
0 1
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5. Identification
• Decomposing the residuals in this triangular fashion is called a Choleski
Decomposition.
• Note that structural shocks (not observed) can now be identified from the
residuals of the standard VAR (observed):
𝑢 =𝐵 𝜀 ⟹ 𝜀 = 𝐵𝑢
𝜀 1 𝑏 𝑢
𝜀 = 𝑢
0 1
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Cholesky Decomposition
• In linear algebra, the Cholesky Decomposition or Cholesky Factorization is a
decomposition of a Hermitian, positive-definite matrix into the product of a
lower triangular matrix and its conjugate transpose:
• 𝑀 = 𝐿𝐿′
• Where L is a lower triangular matrix with real and positive diagonal
entries, and 𝐿′ denotes the conjugate transpose of L.
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Cholesky Decomposition
• It was discovered by André-Louis Cholesky for real matrices, and
posthumously published in 1924.
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6. Impulse Response Function (IRF)
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6.1 IRF
• Their main purpose is to describe the evolution of a model’s variables in
reaction to a shock in one or more variables.
• This feature allows to trace the transmission of a single shock within
an otherwise noisy system of equations and, thus, makes them very
useful tools in the assessment of economic policies.
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6.1 IRF
• The VAR
𝑦 = 𝐴 + 𝐴(𝐿) 𝑦 + 𝑢
• Can be written as:
[𝐼 − 𝐴 𝐿 ]𝑦 = 𝐴 + 𝑢
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6.1 IRF
• Pre multiplying by Ψ 𝐿 = [𝐼 − 𝐴 𝐿 ] we get the Vector Moving
Average (VMA) representation:
𝑦 = 𝜇 + Ψ(𝐿)𝑢
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6.1 IRF
• As we know, the VMA representation can be written in terms of u’s shocks:
𝑦 𝜇 𝜓 (𝑖) 𝜓 (𝑖) 𝑢 ( )
= 𝜇 +
𝑦 𝜓 (𝑖) 𝜓 (𝑖) 𝑢 ( )
𝑦 = 𝜇 +𝜓 0 𝑢 +𝜓 0 𝑢 + ⋯∞
𝑦 =𝜇 +𝜓 0 𝑢 +𝜓 0 𝑢 +⋯∞
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6.1 IRF
• The coefficients of 𝜑 cannot be used to generate the effects of 𝑢 on
the entire path of the 𝑦 sequences.
𝜕𝑦 𝜕𝑦
= =𝜑
𝜕𝑢 𝜕𝑢
• As we know, shocks in the reduced form are correlated.
• We cannot interpret as a casual-effect.
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6.1 IRF
• However, if we know the matrix 𝐵 we can identify shocks as structural,
i.e., not correlated.
• We know that 𝑢 = 𝐵 𝜀 ⇒ 𝜀 = 𝐵𝑢
𝑦 = 𝜇 + Ψ(𝐿)𝑢
𝑦 = 𝜇 + Ψ(𝐿)𝐵 𝐵𝑢
𝑦 = 𝜇 + Θ(𝐿)𝜀
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6. IRF
• Notice that the results of the IRF depends on the identification of the
VAR.
• For example, Cholesky decomposition.
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6.1 IRF
• Thus, the VMA representation can be written in terms of 𝜀’s shocks:
𝑦 𝜇 𝜃 (𝑖) 𝜃 (𝑖) 𝜀 ( )
= 𝜇 +
𝑦 𝜃 (𝑖) 𝜃 (𝑖) 𝜀 ( )
𝑦 = 𝜇 +𝜃 0 𝜀 +𝜃 0 𝜀 + ⋯∞
𝑦 =𝜇 +𝜃 0 𝜀 +𝜃 0 𝜀 + ⋯∞
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6.1 IRF
• The coefficients of 𝜃(𝑖) can be used to generate the effects of 𝜀 on the
entire path of the 𝑦 sequences.
𝜕𝑦 𝜕𝑦
= = 𝜃(𝑖)
𝜕𝜀 𝜕𝜀
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6.1 IRF
• Each element of 𝜃(𝑖) are impact multiplier.
• For example, the coefficient 𝜃 (0) is the instantaneous impact of a one-
unit change in 𝜀 on 𝑦 .
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6.1 IRF
• In the case of a stable VAR(1):
𝑦 , 𝑎 𝑎 𝑎 𝑦 , 𝑢 ,
𝑦 = 𝑎 + 𝑎 𝑎 𝑦 + 𝑢
, , ,
• The VMA representation is:
𝑦 , 𝜇 𝑎 𝑎 𝑢 ,
𝑦 = 𝜇 + 𝑎 𝑎 𝑢
, ,
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6.2 Accumulated IRF
• The accumulated effects of unit impulses in 𝜀 and / or 𝜀 can be
obtained by the appropriate summation of the coefficient of the impulse
response functions.
• Letting n approach to infinity yields the long-run multiplier
𝜃 (𝑖) 𝜃 (𝑖)
= Θ(1)
𝜃 (𝑖) 𝜃 (𝑖)
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7. Forecast Error Variance Decomposition (FEVD)
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• Is used to aid in the interpretation of a VAR model once it has been
fitted.
• The variance decomposition indicates the amount of information each
variable contributes to the other variables in the autoregression.
• It determines how much of the forecast error variance of each of
the variables can be explained by exogenous shocks to the
other variables.
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• We want to forecast one period ahead and we have information until period 𝒕:
• The conditional expectation of 𝑦 is:
• 𝐸𝑦 =𝐴 +𝐴 𝑦
• The observed 𝑦 is:
• 𝑦 =𝐴 +𝐴 𝑦 +𝑢
• Thus, the forecast error is:
• 𝑦 −𝐸 𝑦 =𝑢
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• Then, we want to forecast two periods ahead.
•𝐸𝑦 =𝐴 +𝐴 𝐸 𝑦
•𝐸𝑦 = 𝐴 + 𝐴 (𝐴 + 𝐴 𝑦 )
•𝐸𝑦 = (𝐼 + 𝐴 )𝐴 + 𝐴 𝑦
• The observed 𝑦 is:
•𝑦 =𝐴 +𝐴 𝑦 +𝑢
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• And the forecast error is:
•𝑦 −𝐸 𝑦 =𝐴 +𝐴 𝑦 +𝑢 −𝐴 −𝐴 𝐸 𝑦
•𝑦 −𝐸 𝑦 =𝑢 +𝐴 𝑦 −𝐸 𝑦 =𝑢 +𝐴 𝑢
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• The n-step-ahead forecast:
𝐸𝑦 = (𝐼 + 𝐴 + 𝐴 + ⋯ + 𝐴 )𝐴 + 𝐴 𝑦
• And the associated n-step-ahead forecast error:
𝑢 +𝐴 𝑢 +𝐴 𝑢 + ⋯+𝐴 𝑢
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• From the VMA representation, the n-step-ahead forecast is:
𝑦 ( ) 𝜇 𝜃 (𝑖) 𝜃 (𝑖) 𝜀 ( )
𝑦 = 𝜇 +
( ) 𝜃 (𝑖) 𝜃 (𝑖) 𝜀 ( )
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• The conditional expectation of 𝑦 is:
𝑦 ( ) 𝜇 𝜃 (𝑖) 𝜃 (𝑖) 𝜀 ( )
𝐸 𝑦 = 𝜇 +
( ) 𝜃 (𝑖) 𝜃 (𝑖) 𝜀 ( )
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• Thus, the n-period forecast error is:
𝜃 (𝑖) 𝜃 (𝑖) 𝜀 ( )
𝑦 −𝐸 𝑦 =
𝜃 (𝑖) 𝜃 (𝑖) 𝜀 ( )
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• Focusing solely on the 𝑦 , sequence, we see that the n-step-ahead
forecast error is:
𝑦 , −𝐸 𝑦 , =𝜃 0 𝜀 , +𝜃 1 𝜀 , + ⋯+ 𝜃 𝑛−1 𝜀 , +⋯
+𝜃 0 𝜀 , +𝜃 1 𝜀 , + ⋯+ 𝜃 𝑛−1 𝜀 ,
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• Denote the n-step-ahead forecast error variance of 𝑦 , as 𝜎 (𝑛)
𝜎 (𝑛) = 𝜎 𝜃 (0) +𝜃 (1) + ⋯ + 𝜃 (𝑛 − 1) +⋯
𝜎 𝜃 (0) +𝜃 (1) + ⋯ + 𝜃 (𝑛 − 1)
• Because all values of 𝜃 (𝑖) are necessarily nonnegative, the variance
of the forecast error increases as the forecast horizon n increases.
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• Note that it is possible to decompose the n-step-ahead forecast error
variance into the proportions due to each shock.
• The proportions of 𝜎 (𝑛) due to shocks in the 𝜀 and 𝜀 sequences
are:
𝜎 𝜃 (0) +𝜃 (1) + ⋯ + 𝜃 (𝑛 − 1)
𝜎 (𝑛)
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• And
𝜎 𝜃 (0) +𝜃 (1) + ⋯ + 𝜃 (𝑛 − 1)
𝜎 (𝑛)
• Respectively
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• If 𝜀 shocks explain none of the forecast error variance of 𝑦 , at all forecast
horizons, we can say that the 𝑦 , sequence is exogenous.
• At the other extreme, 𝜀 could explain all the forecast error variance in the
𝑦 at all forecast horizons, so that 𝑦 would be entirely endogenous.
• It is typical for a variable to explain almost all its forecast error variance at
short horizons and smaller proportions at longer horizons.
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• Note that the Choleski decomposition used necessitates that all the
one-period forecast error variance of 𝑦 , is due to 𝜀 .
• The dramatic effects of this alternative assumption are reduced at
longer forecasting horizons.
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8. Granger Causality Test
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• This definition of causality was developed by Granger (1969) and Sims
(1972).
• A test of causality is whether the lags of one variable enter the
equation for another variable.
• In a two-equation model with 1 lag, 𝑦 , does not Granger cause 𝑦 , if
only if 𝑎 is equal to zero.
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• Thus, if 𝑦 , does not improve the forecasting performance of 𝑦 , , then
𝑦 , does not Granger cause 𝑦 , .
6. 𝑦 , =𝑎 +𝑎 𝑦 , +𝑎 𝑦 , +𝑢 ,
7. 𝑦 , =𝑎 +𝑎 𝑦 , +𝑎 𝑦 , +𝑢 ,
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• The direct way to determine Granger causality is to use a standard
F-test to test that restriction.
• 𝐻 :𝑎 =0
• If 𝑦 , is some sort of forecast of the future, such as a future price, then
𝑦 , may help to forecast 𝑦 , even though it does not cause a la Granger
𝑦,.
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16/10/2023

Vector Autoregressive Models (VAR)

Prof. Freddy Espino

• Sims (1980) “Macroeconomics and Reality”, Econometrica, Vol. 48, No.

1., pp. 1-48.

• Stock and Watson (2001) “Vector Autoregressions”, Journal of

Economic Perspectives, Vol. 15, Number 4, Pages 101–115.

• According to Sims (1980), if there is true simultaneity among a set of

variables, they should all be treated on an equal footing; there should

not be any a priori distinction between endogenous and exogenous

current and past realizations of 𝑦 , sequence and vice versa.

2. Vector Autoregressive (VAR)

• Consider the simple bivariate model

• Where it is assumed that

• (i) both 𝑦 , and 𝑦 , are stationary,

• (ii) 𝜀 s are white-noise disturbances with variance 𝜎 and 𝜎 ; and

• (iii) 𝜀 , and 𝜀 , are uncorrelated.

• Equations (1) and (2) constitute a first-order vector autoregression

VAR(1), because it has 1 lag.

• Note that 𝜀 𝑠 are pure innovations (or shocks) in 𝑦 , and 𝑦 , .

• If 𝑏 (𝑏 ) is not equal to zero, 𝜀 , (𝜀 , ) has an indirect

• Using the new notation, we can rewrite in the equivalent form:

• Reduced or Standard VAR:

• Var 𝑢 , 𝑎𝑛𝑑 Var 𝑢 , 𝑎𝑟𝑒 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡

• 𝐶𝑜𝑣 𝑢 , , 𝑢 , = 𝐶𝑜𝑣 𝑢 , , 𝑢 , = 0 for 𝑖 ≠ 0

• The covariance of the two terms is not zero:

• In the case that 𝑏 =𝑏 = 0 the shocks will be uncorrelated.

3.1 Lag Selection

• In a VAR, long lengths quickly consume degrees of freedom.

• If lag length is 𝑝, each of the 𝐾 equations contains 𝐾 × 𝑝 coefficients

plus the intercept term: 𝑁 = 𝐾 + 𝐾 𝑝

• Appropriate lag-length selection can be critical.

• If p is to small, the model is misspecified;

• if p is too large, degrees of freedom are wasted.

3.1 Lag Selection

• There are basically three methods that have been employed to

determine what p should be:

1. By using some theoretical model.

2. By using a rule of thumb.

3.1 Lag Selection

1. By using some theoretical model.

• For example, if one has a DSGE model of an economy in mind, one

would know what the potential set of variables to appear in a VAR

would be, as well as the likely order of it.

• Generally, if data is quarterly a VAR(2) would probably suffice.

3.1 Lag Selection

2. By using a rule of thumb.

• Initially in practice one used to see people choosing p = 4 when

working with quarterly data and p = 6 with monthly data.

• Provided T is small these are probably upper limits to the likely

3.1 Lag Selection

3. By using statistical criteria:

• The idea of imposing a penalty for adding regressors to the model

has been carried further in the Akaike Information Criterion

(AIC) and Schwarz Information Criterion (SIC):

𝐴𝐼𝐶 = −2𝑙 ⁄𝑇 + 2𝑛⁄𝑇

𝑆𝐼𝐶 = −2𝑙 ⁄𝑇 + 𝑛 × 𝑙𝑜𝑔(𝑇)⁄𝑇

3.2 Lag Selection: Lag Exclusion Tests

• Suppose we want to test ℓ against ℓ − 1 lags in a VAR system.

• 𝐿𝑅 = (𝑇 − 𝑚) 𝑙𝑜𝑔 𝛴ℓ − log( 𝛴ℓ ) ~𝜒 (𝑞)

• 𝑇 is the number of usable observations

• 𝑚 is the number of parameters estimated in each equation of the unrestricted