Simultaneous Equations Models

Models that attempt to explain the workings of the economy typically are written as interdependent systems of equations describing some hypothesized technological and behavioural relationships among economic variables. Supply and demand models, Walrasian general equilibrium models, and Keynesian macromodels are common examples. A large part of econometrics is concerned with specifying, testing, and estimating the parameters of such systems. Despite their common use, simultaneous equations models still generate controversy. In practice there is often considerable disagreement over their proper use and interpretation.