The second-stage in an instrumental variable approach to identify simultaneous equations is to
A)include the residuals and the residuals squared from the first-stage in the second-stage estimation.
B)estimate the regression model and use the results to predict the simultaneously determined independent variables.
C)estimate the individual equations including the predicted values of the simultaneously determined independent variables on the right hand side of the equation.
D)include the predicted values of the dependent variables in the second-stage regressions and regress those predictions on the endogenous and exogenous variables.

Question

Quizplus · Accepted Answer

In the second-stage of an instrumental variable approach, the predicted values of the simultaneously determined independent variables from the first stage are included as independent variables in the individual equations. This allows for consistent estimation of the coefficients on the endogenous variables. Option A involves including residuals, which is not necessary in the second stage. Option B involves using the results to predict independent variables, but does not address how to estimate the individual equations. Option D involves including predicted values of the dependent variables, which is not appropriate in the second stage. Therefore, option C is the correct answer.

The Second-Stage in an Instrumental Variable Approach to Identify Simultaneous