National open university of nigeria introduction to econometrics II eco 356

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Introduction to Econometrics ECO 356 Course Guide and Course Material
Introduction to Econometrics ECO 356 Course Guide and Course Material

INTRODUCTION TO ECONOMETRICS II

ECO 306

NOUN
132 disturbance terms. You can see that this is the case with the price inflation/wage inflation model. In this model, there is only one exogenous variable, U.
wdepends on it directly p does not depend on it directly but does so indirectly because
w determines it. Similarly, both p and wdepend on

, p directly and w indirectly. And both depend on

, w directly and p indirectly. The dependence of w on
means that OLS would yield inconsistent estimates if used to fit equation [5.01], the structural equation for p. w is a stochastic regressor and its random component is not distributed independently of the disturbance term
Similarly the dependence of p on

means that OLS would yield inconsistent estimates if used to fit [5.02]. Since [5.01] is a simple regression equation, it is easy to analyze the large-sample bias in the OLS estimator of

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