INTRODUCTION TO ECONOMETRICS II ECO 306 NOUN 131 externally. Thus in the present case,p and ware both endogenous, and U is exogenous. The exogenous variables and the disturbance terms ultimately determine the values of the endogenous variables, once the complexity is cleared. The mathematical relationships expressing the endogenous variables regarding the exogenous variables and disturbance terms are known as the reduced form equations. The original equations that we wrote down when specifying the model are described as the structural equations. We will derive the reduced form equations for p and w. To obtain that for p, we take the structural equation for p and substitute for w from the second equation
…[5.05] Similarly we obtain the reduced form equation for w:
(
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…[5.06] Hence (
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…[5.07] and sob Simultaneous Equations Bias In almost all simultaneous equations models, the reduced form equations express the endogenous variables regarding all of the exogenous variables and all of the
