.

GROUPMEMBERS STUDENT NUMERS

SITHOLEPRIVILEDGE N02019861T
SULOSHARMAINE N02019063B
TEKEDEMUFAROWAISHETANATSWA N02019700H
THOMASMERCY N02019388B
TSHUMABUKHOSILESEGO N02017634R
TSHUMANOMPILOWAZWITA N02019970Y
TUBUTHEPAULLETTE N02016736X
ZHOUBLESSING N0201666X
ZHOUTAFADZWA N0198099M
ZVINGWARUTHABANIDAVISON N02021693R
ZWIDZAITAFADWA N0198962B
LWAZILWENKOSIMPOFU N0173477P
MARUFUMUNYARADZIFRANK N0198680C

T O P I C : S I M U LTA N E O U S E Q U AT I O N S E S T I M AT I O N S – ( R E D U C E D F O R M M E T H O D , T W O S TA G E
LEAST SQUARES
Definition of Terms
1. Simultaneous equations – this is an economic model that consists of two or more
or identities. The dependent variable can be an independent variable in another
system
2. Exogenous variables – these are variables that do not depend on other variables
in the model . There are said to be independent.
3. Endogenous variables – these are variables which depend on other variables in
the model. These are said to be dependent variables
Reduced form method
Two Stage Least Squares (2SLS)
• This a single equation method applied to one equation of the system at a time.
• It is used for estimating over-identified models.
• The basic aim of the procedure is to obtain estimates that are efficient, at least
asymptotically.
• It reduces simultaneous bias in the parameter estimates.
Steps
• Apply the OLS to the reduced form equations in order to obtain estimates i.e
values of the endogenous variables and their lagged values that may appear
possibly as explanatory variables.
• Replace the endogenous variables appearing on the right hand side of the SF
equations by their fitted values.
• Apply the OLS to the transformed structural equations to obtain 2SLS estimates
of the structural parameters.
Assumptions of 2SLS
1. The error term must satisfy the usual stochastic assumption i.e has the mean
zero and constant variance and zero covariance.
2. The error term of the reduce form equations vi must have mean zero,
constant variance and zero covariance, vi must be independent of the
exogenous variables.
3. Explanatory variables are not properly aggregated.
4. Assume model specification is correct as far as exogenous variables are
concerned. There is no need to know all mathematical formulation of the
whole system in all its details but must correctly specify all exogenous
variables.
 Properties of SLS
1. It is appropriate for the estimation of over-identified equations.
2. 2SLS yields efficient estimates under conditions in which OLS fails (over-
identification)
3. The assumption of knowledge of all predetermined variables of the complete
system of simultaneous equations if violated will yield estimates without the
optimal properties.