Background
A Simultaneous Equations Model (SEM) refers to an econometric approach used to represent relationships where multiple endogenous variables are influenced simultaneously by each other and by exogenous variables.
Historical Context
Simultaneous equations models became more prominent with the development of modern econometrics in the mid-20th century, revealing insights into complex economic relationships that couldn’t be captured with single-equation models.
Definitions and Concepts
A Simultaneous Equations Model involves:
- Endogenous Variables: Variables whose values are determined within the model.
- Exogenous Variables: Variables that influence endogenous variables but are not influenced by them within the model system.
An example is a set of demand and supply equations, where price and quantity are endogenously determined in the market equilibrium.
Major Analytical Frameworks
Classical Economics
Classical economists typically analyzed single-equation models. Their analytical methods served as stepping stones for the more advanced simultaneous equations models.
Neoclassical Economics
The neoclassical school extended classical theories, providing rigorous mathematically-formulated models that laid the foundations for SEM.
Keynesian Economic
Keynesian economics influenced the development of simultaneous equations models by emphasizing the role of multiple, interrelated aggregate variables (like investment, consumption, and national income).
Marxian Economics
Though Marxian economic analysis isn’t based on arbitrary statistical models, it identifies interdependent relationships among economic variables that align with the underlying approach of SEM.
Institutional Economics
Institutional economists utilize complex models like SEM to account for institutional impacts on economic variables, showing their role in supporting or hindering economic performance.
Behavioral Economics
Behavioral economics may integrate SEM to understand how psychological factors impact economic decisions, identifying simultaneous influences.
Post-Keynesian Economics
Post-Keynesian models extend Keynesian ideas with more focus on time-related dynamics and structural influences, compatible with SEM frameworks.
Austrian Economics
Austrian economics focuses on individual actions and decentralizes modeling approaches, standing in contrast to the aggregate-based SEM.
Development Economics
SEM in development economics can analyze multi-faceted, interrelated factors driving economic development, considering endogenous variables like investment levels and human capital.
Monetarism
Monetarists employ models to explain the relationship between money supply and macroeconomic variables. SEM can be used but is less typically highlighted in monetarist methodology.
Comparative Analysis
The efficiency of SEM can be gauged by comparing the predictive capabilities of single-equation models vs. multiple interconnected equations, especially under policy-shock scenarios where interdependencies matter.
Case Studies
Example 1: Demand and Supply
Typical SEM models the equilibrium where both demand and supply equations determine price and quantity.
Example 2: IS-LM Model
SEM captures the interplay between economic output (IS curve) and interest rates (LM curve) in the macroeconomic environment.
Suggested Books for Further Studies
- Greene, W. H. Econometric Analysis.
- Stock, J. H., & Watson, M. W. Introduction to Econometrics.
- Wooldridge, J. M. Introductory Econometrics: A Modern Approach.
Related Terms with Definitions
- Indirect Least Squares: Estimation method for one equation within a simultaneous system.
- Reduced Form: Expresses endogenous variables solely in terms of exogenous variables and disturbances.
- Structural Equation: Original equations specifying the behavioral and technical relationships among variables.
This dictionary entry aims to provide a comprehensive understanding and essential resources to explore further into the Simultaneous Equations Model in econometrics.
