Which of the following correctly highlights a limitation of applying simultaneous equation models to time series data?
A)Most time series have variables with a unit root and 2SLS is complicated when applied to equations with such variables.
B)2SLS estimates are inefficient when applied to variables that are not in their levels but in first differences.
C)It is difficult to form simultaneous equations which satisfy the rank and order conditions using time series data.
D)The problem of serial correlation greatly limits the efficiency of simultaneous equation models and leads to inefficient estimations.

Question

Quizplus · Accepted Answer

Simultaneous equation models require the variables in the equations to be stationary, but most time series have variables with a unit root. Two-Stage Least Squares (2SLS), a commonly used method in simultaneous equation models, is complicated when applied to equations with unit root variables.

Which of the Following Correctly Highlights a Limitation of Applying