8. Simultaneous Equations Models

Many economic theories are based on models with several equations, i.e., on systems of equations. Since these equations are not independent of each other, the interaction of the different variables has important consequences for the estimation of each equation and for the system as a whole. This chapter tackles this issue and deals with simultaneous equations models. It starts by outlining the analytical framework before turning to the possibility or not of estimating the parameters of the model, known as identification. It then presents the estimation methods relating to simultaneous equations models and the specification test proposed by Hausman. An empirical application is provided at the end of the chapter to illustrate the concepts presented in a simple way.