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Two-Step Generalized Least Squares Estimators in Multi-equation

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  • Hoffman, Dennis L

Abstract

Despite the critical analysis of Pagan (1984) and several subsequent applied studies, empirical models characterized by expectations are often estimated with "generated regressor" proxies that are treated as ordinary nonstochastic regressors. This paper offers a Generalized Least Squares estimator designed to cope with the nonscalar disturbance matrix precipatated by generated regressors. The approach is designed as a natural extension of Pagan's analysis and the author demonstrates how it may be applied to multi-equation models. Experimentation with numerical examples reveals the potential severity of ignoring the problem. These results also suggest an easily calculated indicator of potential inference distortion in models that fail to account for "generated regressors." Copyright 1987 by MIT Press.

Suggested Citation

  • Hoffman, Dennis L, 1987. "Two-Step Generalized Least Squares Estimators in Multi-equation," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 336-346, May.
    • Handle: RePEc:tpr:restat:v:69:y:1987:i:2:p:336-46
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    Cited by:

    1. Nijman, T.E. & Steel, M.F.J., 1988. "Exclusion restrictions in instrumental variables equations," Research Memorandum FEW 327, Tilburg University, School of Economics and Management.
    2. Lingsheng Meng & Binzhen Wu & Zhaoguo Zhan, 2016. "Linear regression with an estimated regressor: applications to aggregate indicators of economic development," Empirical Economics, Springer, vol. 50(2), pages 299-316, March.
    3. Burton, Diana M. & Love, H. Alan, 1996. "A Review of Alternative Expectations Regimes in Commodity Markets: Specification, Estimation, and Hypothesis Testing Using Structural Models," Agricultural and Resource Economics Review, Cambridge University Press, vol. 25(2), pages 213-231, October.
    4. Richards, Timothy J. & Patterson, Paul M., 2000. "New Varieties And The Returns To Commodity Promotion: The Case Of Fuji Apples," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 29(1), pages 1-14, April.
    5. Joseph Findlay & Caleb Piche-Larocque & Akhter Faroque, 2022. "Cost Estimation and Health Benefits Determinants of Medical Innovations Across Canadian Provinces," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 14(9), pages 1-25, September.
    6. Hakan Berument & Kamuran Malatyali, 1999. "Determinants of interest rates in Turkey," Discussion Papers 9902, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    7. James Hilger & Eric Hallstein & Andrew W. Stevens & Sofia B. Villas-Boas, 2019. "Measuring Willingness to Pay for Environmental Attributes in Seafood," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(1), pages 307-332, May.
    8. Brorsen, B. Wade & Coulibaly, Nouhoun & Richter, Francisca G.-C. & Bailey, DeeVon, 2001. "Feeder Cattle Price Slides," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(1), pages 1-18, July.
    9. Lin, Anchor Y. & Swanson, Peggy E., 2004. "International equity flows and developing markets: the asian financial market crisis revisited," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(1), pages 55-73, February.
    10. Couch, Robert & Wu, Wei, 2012. "Private investment and public equity returns," Journal of Economics and Business, Elsevier, vol. 64(2), pages 160-184.
    11. Hakan Berument & Halil Kiymaz, 2001. "The day of the week effect on stock market volatility," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 25(2), pages 181-193, June.
    12. Nikola Mirkov & Gisle James Natvik, 2016. "Announcements of Interest Rate Forecasts: Do Policymakers Stick to Them?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 901-920, August.
    13. Hoffman, Mathias, 2001. "The Relative Dynamics of Investment and the Current Account in the G7-Economies," Economic Journal, Royal Economic Society, vol. 111(471), pages 148-163, May.
    14. Epstein, Andrew J. & Nicholson, Sean, 2009. "The formation and evolution of physician treatment styles: An application to cesarean sections," Journal of Health Economics, Elsevier, vol. 28(6), pages 1126-1140, December.
    15. Clive Granger & Yongil Jeon, 2000. "Model evaluation based on residual analysis of two similar models," Applied Economics, Taylor & Francis Journals, vol. 32(7), pages 861-867.
    16. Jimmy Lockwood & Larry Lockwood & Sie Ting Lau, 2016. "Lost In Translation: Which Stock Prices Bear The Burden To Adjust To Exchange Rates?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 39(3), pages 263-290, September.

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