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Lecture 23

# ECON321 Lecture Notes - Lecture 23: Probit, Heteroscedasticity, Autocorrelation

Department
Economics
Course Code
ECON321
Professor
Kathleen Rybczynski
Lecture
23

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Simultaneous Causality
Usually we assume that causality is one way.
Ex/ more education increases productivity
which increases wages.
But what if causality runs both ways?
Simultaneous Causalitywhen X causes Y
AND Y causes X simultaneously.
Ex/ # of police per capita affects # of murder
rates per capita. But number of murder rates
per capita also affects the police force.
Introduction to Econometrics, Notes 23 p.1

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Simultaneous Causality Bias- OLS estimators
will be biased and inconsistent in the presence
of simultaneous causality.
Suppose we have the following structural
model:
Y=1X12X2u
(1)
X1=1Y2Zv
(2)
Y will be correlated with v
Introduction to Econometrics, Notes 23 p.2

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Consider:
Y=11Y2Zv2X2u
so
Y111=2X212Z1vu
Y=1X22Z
(3)
where
1=2
111,2=12
111,and = 1vu
111
equation 3 is known as the reduced form
equation
Introduction to Econometrics, Notes 23 p.3