A new specification test for single equations in a simultaneous equation model is introduced. The test is based on a comparison between estimates from alternative normalizations of the model. While normalization does not matter under correct specification, it is demonstrated in the paper that probability limits for the estimates of the structural coefficients will be different for alternative normalizations in the presence of misspecification. A simple test which exploits this feature is developed and some Monte Carlo experiments are performed in order to show the power properties of this test for realistic samples.
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Article provided by Department of Economics, Economics I, Bayreuth University in its journal Macroeconomics.
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