An alternative to using simultaneous equation models with panel data is:
A)to use OLS estimates after first differencing the data.
B)to use fixed effects transformation on the equations and then apply 2SLS.
C)to convert the equations into reduced form and then apply feasible generalized least squares.
D)to convert the equations into reduced form and then apply OLS.

Question

Quizplus · Accepted Answer

Using fixed effects transformation on the equations helps to account for unobserved heterogeneity across panel units. This helps to overcome the endogeneity issues associated with using OLS in panel data. Applying 2SLS on the transformed equations further helps to address any potential endogeneity bias. Therefore, using fixed effects transformation followed by 2SLS is a good alternative to using simultaneous equation models with panel data.

An Alternative to Using Simultaneous Equation Models with Panel Data