Sim Eq

Intro to SimEq.
xls
This workbook implements a simultaneous equations DGP in order to show
1) the problems resulting from nave, single equation estimation and
2) how the method of Two Stage Least Squares (2SLS) can be used to estimate the model.
The example is built around a crime and enforcement spending simultaneous equations model.
The idea is that spending on law enforcement goes up when the crime rate rises, but the crime rate is not exogenous.
We are interested in estimating the magnitude of the increase in enforcement spending when the crime rate rises.
The Data sheet does most of the work. It has the DGP and a variety of graphs to explain simultaneity bias resulting from OLS
and how 2SLS can be used to estimate the model correctly.
Other sheets include:

GiniData: a resource for estimates of Gini coefficients in several countries.
MCSimOLS: Demonstration of simultaneity bias from OLS.
MCSimOLS2SLS: Compares OLS and 2SLS, showing that the latter works.
This workbook contains other sheets that are hidden and are displayed as needed. Here are two that have documentation on
The CrimeRate sheet contains historical crime rate data from the US
The Expenditures sheet contains historical data on law enforcement expenditures for the US.
s not exogenous.
me rate rises.
bias resulting from OLS
have documentation on the data.

A B C D E F G
1 Variable Description
2 Enforcement Spending is dollars per person on law enforcement in one year; US Average is about $520 per person as o
3 The Bureau of Justice Statistics is an excellent source for information on crime and justice system.
4 http://www.ojp.usdoj.gov/bjs/ To see worksheets containing data on crime rates and expenditures, c
5 Crime Rate is the number of "index" crimes per 100,000 people in one year; the U.S. Average is about 4000 as of 2002.
6 The Gini coefficient measures income inequality; min is 0 (everyone has the same income); max is 100 percent, or 1.0 (
7
8 The key parameter is 1, the effect on Enforcement Spending of a unit increase in the Crime Rate.
9 Given the hypothetical parameter values below, if the Crime Rate rises by 1000, Enforcement Spending rises
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11 Data Generation Process
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13
14 275
15 0.02
16 SDErrorES 10
17 SDErrorCR
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19 Hypothetical Data. Cross section. Each observation is a geographic area (e.g., county or state) at a given tim
20 Average --> 43.95 #VALUE! #VALUE! #VALUE!
Enforcement
21 Crime Rate Spending
Observation Gini Error Error Crime Rate
22 1 49 #VALUE! #VALUE! #VALUE!
42
43 #VALUE!
44 #VALUE!
A B C D E F G
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A B C D E F G
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H I J K L M N O
1
ar; US Average2is about $520 per person as of 1999.
mation on crime3 and justice system.
ining data on crime
4 rates and expenditures, click the button to the right.
ar; the U.S. Average
5 is about 4000 as of 2002.
he same income);6 max is 100 percent, or 1.0 (one person has everything).
7
ease in the Crime
8 Rate.
ate rises by 1000,
9 Enforcement Spending rises by $20/per person.
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14 6000
15 -15
16 75
17 1
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19county or state) at a given time.
aphic area (e.g.,
20 #VALUE!
21 Enforcement
Spending Single-Equation OLS Estimation of Enforcement Spending
22 #VALUE! g1
23 #VALUE! #VALUE! #VALUE!
26 #VALUE! #VALUE! 18
E n fo r c e m e n t S p e n d in g

28 #VALUE!
29 #VALUE!
30 #VALUE!
31 #VALUE!
#VALUE! f(x) =
32 Single-Equation Estimation
#VALUE! 375
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365
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37 #VALUE! 345
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39 #VALUE! 335
3485 3585 3685 3785 3885
Crim e3985
Rate 4085 4185 428
40 #VALUE!
41 #VALUE!
42
43 #VALUE! max
44 #VALUE! min
H I J K L M N O
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H I J K L M N O
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101 OLS Large Sample Bias
102 This calculation uses plims, which is beyond
103 the scope of this book. It is used to confirm
104 the Monte Carlo simulation.
105 1 0.02
106 EV(g1) -0.0105185496
107 Bias 0.0305185496
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P Q R S T U V W X
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mation of Enforcement Spending Understanding Simultaneity Bias
22 In the graph below, the red line reflects the true relationship
23 between Enforcement Spending and the Crime Rate.
24 This OLS fitted line is confounded by the fact that Crime Rate
25 is actually an endogenous variable.
26 Set SDErrorES
27
Enf orc ement Spending
28 SDErrorES
29 10
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f(x) =
31 Understanding Simultaneity Bias
-Equation 32
Estimation
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3785 3885
Crim e 3985
Rate 4085 4185 4285 4385 3485 3585 3685 3785 3885Crime3985
Rate 4085 4185 4285 4385
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42 If you change a parameter and the graph appears empty, click the Repair Axes button.
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P Q R S T U V W X
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E n fo rc e m e n t S p e n d in g
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Obs Tracing the Movement of One Observation
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Number Gini 375
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59 7 40 335
60 8 44 3485 3585 3685 3785 3885
Crim e3985
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61 9 47
62 10 41 slope of traced line -0.066667
En f o r c e me n t S p e n d in g
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64 12 43
65 13 42
66 14 48
67 15 43 Tracing the Movement of Two Observations
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17 47 370
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365
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71 19 40 355
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Crime3985
Rate 4085 4185 4285 4385
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78 Set SDErrorES
Enf orc ement Spending
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80 SDErrorES
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f(x) =
83 Tracing All Observations
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86 365
87 Set 1 360
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89 1 345
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Crime3985
3485 3585 3685 3785 3885 Rate 4085 4185 4285 4385
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P Q R S T U V W X
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94 When the strips are tilted (1<>0 and SEErrorES>0), OLS is biased.
95 If the strips are vertical (1=0 or SEErrorES>0), OLS is OK.
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101 Predicted ES Deterministic Data for Tracing One
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103 CR ES CR ES
104 4269.231 360.3846 3780 347.9456
105 4153.846 358.0769 3711 352.6072
106 4096.154 356.9231 3632 357.8665
107 3980.769 354.6154 3876 341.6625
108 3923.077 353.4615 3630 358.0235
109 3923.077 353.4615 3738 350.7315
110 3750 350 3748 350.1434
111 3980.769 354.6154 3817 345.466
112 4153.846 358.0769 3620 358.6438
113 3807.692 351.1538 3664 355.7057
114 3807.692 351.1538
115 3923.077 353.4615
116 3865.385 352.3077
117 4211.538 359.2308
118 3923.077 353.4615
119 3865.385 352.3077
120 4153.846 358.0769
121 4153.846 358.0769
122 3750 350
123 3865.385 352.3077
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Y Z AA AB AC AD AE AF AG
1 Two Stage Least Squares (2SLS)
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3 CrimeRatei = 0 + 1 Enforceme
4 Reduced form expressions for Crime Rate and Enforcement Spending
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17 Two-Stage Least Squares
18 Stage 1: Regression to create the Instrumental Variable Stage 2: Regression with th
19 Regress CR on the exo var, Gini, and calculate Replace CR with Predicted
20 Predicted CR. and apply OLS.
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CR = f(GINI) Predicted CR ES= f(Predicted CR)
22 #VALUE! #VALUE! #VALUE! g1
23 #VALUE! #VALUE! #VALUE! #VALUE!
25 #VALUE! 18 #VALUE! #VALUE!
27 #VALUE! #VALUE!
28 f(x) = #VALUE!
29 Stage 1: Creating the IV
#VALUE!
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Crime Rate
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f(x) =
32 #VALUE! Stage 2: Usin
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Pred
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>0), OLS is biased.
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100 line length 1000
101 Data for Tracing Seco Data for Tracing All Obs
102 Gini=40 Gini=41
103 CR ES CR ES CR ES
104 3759 349.312 #VALUE! #VALUE! #VALUE! #VALUE!
107 3948
Second336.8656 Gini=42 Gini=43
108 3757
Obs 349.5364 CR ES CR ES
112 3659 356.1386 Gini=44 Gini=45
113 3669 355.3535 CR ES
114 4219 363.7936 #VALUE! #VALUE!
115 4340 355.5941 #VALUE! #VALUE!
116 4138
First 369.2055 #VALUE! #VALUE!
117 4216
Obs 363.9162 Gini=46 Gini=47
118 4261 360.8607 CR ES CR ES
122 4196 365.2489 Gini=48 Gini=49
123 4075 373.2839 CR ES CR ES
AH AI AJ AK AL AM AN AO AP
1
2 CR
CrimeRatei =
3 0 + 1 EnforcementSpending i+ 2 Ginii + i
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Least Squares17
Stage 18
2: Regression with the Instrumental Variable
19CR with Predicted CR in the original ES equation
Replace
and apply
20 OLS.
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ES= f(Predicted CR) Predicted ES
22 #VALUE!
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24 #VALUE! #VALUE!
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26 18 #VALUE!
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f(x) =
32 Stage 2: Using the IV#VALUE!
to Estimate g1
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Predicted 4085.0
Crim e Rate (IV) 4285.0
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Applying the 2SLS Estimates

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AQ AR AS AT AU AV AW AX AY
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AZ BA BB BC BD BE BF BG
1 Getting the SEs for 2SLS Right
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19 Getting the Right SEs from 2SLS
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21 Relevant Adjustment
Residuals2 Factor g0 g1
22 #VALUE! #VALUE! 2SLS est #VALUE! #VALUE!
23 #VALUE! 2SLS SE #VALUE! #VALUE!
24 #VALUE!
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BH BI BJ BK BL BM BN BO BP
1 Indirect Least Squares
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14 Google "indirect least squares" to see that this is another way to estimate a structural parameter.
15 In this example, 2SLS and ILS are equivalent.
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19 Indirect Least Squares
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CR = f(GINI) ES = f(GINI)
25 #VALUE! 18 #VALUE! 18
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29 g1
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BQ BR BS BT BU BV BW BX
1 Advanced Thinking: Why Can't We Use the Same Procedu
2 Parameters of the CR Equation? Because the CR parame
3
4 The problem is Perfect Multicollinearity: From the first stage, Predicted ES
5 The second stage regression includes both Predicted ES and Gini, but the
6 the second stage regression can't separate out the contributions of Predic
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8 In technical language, the paramaters in the CR equation are not identified
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13 Two Stage Least Squares
y to estimate a14
structural parameter. Stage 1: Regression to create the Instrumental Variable
15 Regress ES on the exogenous variable, Gini, and
16 calculate Predicted ES
17 "x" variables for CR equation
18 ES = f(GINI) Predicted ES
21
#VALUE! #VALUE! #VALUE!
22 #VALUE! 18 #VALUE!
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40 Stage 1: Creating the IV
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Crime Rate
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f(x) = Gini
Stage 1: Creating the IV
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BQ BR BS BT 8
BU BV BW BX
Crime Rate
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BY BZ CA CB CC CD CE CF
y Can't We Use
1 the Same Procedure to Obtain Estimates for the
uation? Because
2 the CR parameters are not identified
3
nearity: From the4 first stage, Predicted ES is a linear function of Gini.
cludes both Predicted
5 ES and Gini, but these are perfectly collinear. Thus
n't separate out 6the contributions of Predicted ES and Gini.
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maters in the CR8equation are not identified.
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Two
13 Stage Least Squares
e Instrumental14 Variable Stage 2: Regression with the Instrumental Variable
15 Replace ES with Predicted ES in the original CR equation
16 and apply OLS
"x" variables17
for CR equation
18 Gini CR= f(Predicted ES) Predicted CR
19 49 b 2
b 1
b 0 #VALUE!
20 47 #VALUE! #VALUE! #VALUE! #VALUE!
21
25 40 #VALUE!
26 44 In Excel 2003, one of the coefficients #VALUE!
27 47 (either b1 or b2) will be zeroed out. #VALUE!
28 41 Other versions of Excel will also #VALUE!
29 41 signal multicollinearity. #VALUE!
30 43 #VALUE!
31 42 Regression fails due to multicollinearity. #VALUE!
32 48 There are an infinite number of solutions #VALUE!
33 43 to the minimize-SSR problem. Therefore #VALUE!
34 42 we cannot determine (identify) the #VALUE!
35 47 values of estimates of 1 and 2. #VALUE!
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37 40 #VALUE!
38 42 #VALUE!
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eating the IV 40
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eating the IV
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GiniData
Source:
Inter-American Development Bank
Banco Interamericano de Desarrollo (BID)
Research department
Departamento de investigacin
Working Paper #410
The 1990s in Latin America: Another Decade of Persistent Inequality
Miguel Szkelyand Marianne Hilgert
December 1999
Table 1
Changes in Income Inequality Around the World in the 1990s
Yearly
Change Change Yearly
End (Gini (Gini Change
Country Start Year Year Gini Year 1 Gini Year 2 Points) Points) (%)
Bolivia 1996 1997 0.5877 0.589 0.001 0.001 0.23
Brazil 1992 1996 0.5728 0.5906 0.018 0.018 3.114
Chile 1990 1996 0.547 0.5638 0.017 0.002 0.439
Colombia 1991 1998 0.567 0.5679 0.001 0 0.022
Costa Rica 1989 1997 0.4595 0.4589 -0.001 0 -0.015
Ecuador 1995 1998 0.56 0.5601 0 0 0.009
El Salvador 1995 1998 0.505 0.5589 0.054 0.018 3.559
Honduras 1989 1998 0.5704 0.5876 0.017 0.003 0.504
Mexico 1989 1996 0.5309 0.5276 -0.003 0 -0.088
Nicaragua 1993 1998 0.5669 0.6024 0.035 0.007 1.252
Panama 1991 1997 0.5625 0.5755 0.013 0.002 0.385
Paraguay 1995 1998 0.6203 0.5692 -0.051 -0.017 -2.746
Peru 1991 1997 0.4643 0.5055 0.041 0.007 1.479
Uruguay 1989 1997 0.4064 0.43 0.024 0.004 0.967
Venezuela 1995 1997 0.4703 0.4963 0.026 0.013 2.761
Latin American Average 0.013 0.004 0.792
Canada 1991 1994 0.3501 0.3544 0.004 0.001 0.411
USA 1991 1994 0.4157 0.4404 0.025 0.008 1.987
North America Average 0.015 0.005 1.199
Australia 1989 1994 0.3809 0.3915 0.011 0.002 0.558
Finland 1991 1995 0.2742 0.2918 0.018 0.004 1.606
France 1989 1994 0.3395 0.3427 0.003 0.001 0.188
Germany 1989 1994 0.3266 0.3464 0.02 0.004 1.213
Italy 1991 1995 0.3107 0.3621 0.051 0.013 4.136
Luxembourg 1991 1994 0.2694 0.2694 0 0 -0.005
Neatherlands 1991 1994 0.3256 0.3366 0.011 0.004 1.119
Norway 1991 1995 0.2883 0.2935 0.005 0.001 0.45
Sweden 1992 1995 0.2839 0.2885 0.005 0.002 0.538
United Kingdom 1991 1995 0.3898 0.3966 0.007 0.002 0.439
Western Europe Average 0.015 0.004 1.158
Hungary 1991 1994 0.2874 0.332 0.045 0.015 5.178
Poland 1992 1995 0.325 0.3749 0.05 0.017 5.122
Russia 1992 1995 0.4404 0.4525 0.012 0.004 0.915
Eastern Europe Average 0.036 0.012 3.738
Thailand 1992 1996 0.5589 0.5129 -0.046 -0.011 -2.058
Taiwan 1991 1995 0.3049 0.3027 -0.002 -0.001 -0.18
East Asia Average -0.024 -0.006 -1.119
Results of Monte Carlo Simulation
Sample
Number $M$23 Simulation Stats
1 0.007 1000 repetitions
2 -0.021 10 seconds Summary Statistics
3 -0.013 Average
4 -0.0051 SD
5 -0.0114 Max
6 -0.0132 Min
7 -0.0027
8 -0.0039 Histogra
9 0.0103
10 -0.0049
11 -0.020
12 0.002
13 -0.014
14 -0.009
15 -0.011
16 -0.003
17 -0.016
18 -0.006
19 -0.012
-0.028 -0.023 -0.018 -0.013 -0.008
20 -0.017
21 -0.017
22 -0.004
23 -0.017
24 -0.006
25 -0.018
26 -0.004
27 -0.009
28 -0.010
29 -0.015
30 -0.004
31 -0.012
32 0.007
33 -0.007
34 -0.005
35 -0.011
36 -0.003
37 -0.011
38 -0.007
39 -0.015
40 -0.009
41 -0.013
42 -0.008
43 0.000
44 -0.013
45 -0.009
46 -0.015
47 0.006
48 -0.009
49 -0.003
50 -0.016
51 -0.002
52 -0.014
53 -0.006
54 -0.015
55 -0.004
56 -0.014
57 -0.014
58 -0.011
59 -0.009
60 -0.004
61 -0.010
62 -0.010
63 -0.011
64 -0.002
65 0.008
66 -0.019
67 -0.001
68 -0.005
69 -0.013
70 0.004
71 -0.011
72 -0.002
73 -0.017
74 -0.004
75 -0.004
76 -0.014
77 0.001
78 -0.011
79 0.001
80 -0.007
81 -0.013
82 0.000
83 -0.010
84 -0.011
85 -0.013
86 -0.009
87 -0.009
88 -0.024
89 -0.014
90 -0.007
91 -0.002
92 -0.017
93 -0.009
94 -0.018
95 -0.012
96 -0.010
97 -0.005
98 -0.009
99 -0.018
100 -0.009
Only the first 100 repetitions are displayed on this worksheet.
Summary Statistics Notes
-0.008
0.0073
0.020
-0.028
Histogram of $M$23
-0.028 -0.023 -0.018 -0.013 -0.008 -0.003 0.002 0.007 0.012 0.017
0 $M$23
0 -0.028 0
0.1290323 0 -0.028 1
0.2580645 3 -0.027 1
0.3870968 4 -0.027 3
0.516129 8 -0.026 3
0.6451613 4 -0.026 1
0.7741935 9 -0.025 1
0.9032258 9 -0.025 3
1.032258 12 -0.024 3
1.1612903 8 -0.024 5
1.2903225 3 -0.023 5
1.4193548 6 -0.023 2
1.5483871 7 -0.022 2
1.6774193 6 -0.022 7
1.8064516 6 -0.021 7
1.9354838 2 -0.021 11
2.0645161 5 -0.02 11
2.1935483 2 -0.02 22
2.3225806 3 -0.019 22
2.4516128 2 -0.019 21
2.5806451 1 -0.018 21
2.7096773 0 -0.018 29
2.8387096 0 -0.017 29
2.9677418 0 -0.017 24
3.0967741 0 -0.016 24
3.2258064 0 -0.016 30
3.3548386 0 -0.015 30
3.4838709 0 -0.015 41
3.6129031 0 -0.014 41
3.7419354 0 -0.014 61
3.8709676 0 -0.013 61
3.9999999 0 -0.013 69
-0.012 69
-0.012 53
-0.011 53
-0.011 50
-0.01 50
-0.01 65
-0.009 65
-0.009 49
-0.008 49
-0.008 56
-0.007 56
-0.007 53
-0.006 53
-0.006 54
-0.005 54
-0.005 34
-0.004 34
-0.004 33
-0.003 33
-0.003 38
-0.002 38
-0.002 30
-0.001 30
-0.001 30
0 30
0 20
0.001 20
0.001 15
0.002 15
0.002 18
0.003 18
0.003 14
0.004 14
0.004 11
0.005 11
0.005 11
0.006 11
0.006 11
0.007 11
0.007 5
0.008 5
0.008 4
0.009 4
0.009 1
0.01 1
0.01 2
0.011 2
0.011 3
0.012 3
0.012 1
0.013 1
0.013 1
0.014 1
0.014 0
0.015 0
0.015 0
0.016 0
0.016 1
0.017 1
0.017 4
0.018 4
0.018 1
0.019 1
0.019 0
0.02 0
0.02 2
0.021 2
0.021 0
Results of Monte Carlo Simulation
Sample Data! Data!
Number $M$23 $AG$23 Simulation Stats
1 0.001 0.035 1000 repetitions
2 -0.021 0.004 11 secs Data!$M$23
3 -0.007 0.010 Average -0.008
4 -0.007 0.020 SD 0.0076
5 0.006 0.029 Max 0.023
6 -0.006 0.016 Min -0.030
7 -0.007 0.005
8 -0.013 0.010 Histogram of Data!
9 0.005 0.028
10 -0.009 0.003
11 -0.004 0.038
12 -0.007 0.016
13 0.000 0.022
14 0.017 0.066
15 -0.003 0.030
16 -0.022 0.012
17 -0.005 0.021 1
18 -0.019 0.001
19 0.007 0.035
20 -0.014 0.018 -0.0325 -0.0125 0.0075 0.02
21 -0.012 0.001
22 -0.012 0.006
23 -0.015 0.029
24 0.000 0.019
25 -0.006 0.058
26 -0.014 0.001
27 -0.011 0.009
28 -0.012 0.005
29 -0.011 0.008
30 -0.002 0.018
31 -0.010 0.017
32 -0.008 0.007
33 -0.009 0.041
34 0.002 0.039
35 -0.005 0.049
36 -0.015 0.001
37 0.002 0.039
38 -0.007 0.025
39 -0.010 0.021
40 -0.017 0.009
41 -0.011 0.007
42 -0.014 0.016
43 -0.009 0.013
44 -0.003 0.029
45 -0.010 0.027
46 -0.013 0.012
47 -0.007 0.033
48 0.012 0.053
49 -0.004 0.040
50 -0.007 0.002
51 -0.011 0.012
52 0.000 0.058
53 -0.009 0.018
54 -0.014 0.012
55 -0.014 0.019
56 -0.003 0.028
57 -0.015 0.011
58 -0.007 0.016
59 -0.018 0.018
60 -0.004 0.021
61 -0.010 0.014
62 0.002 0.023
63 0.004 0.028
64 -0.003 0.064
65 -0.008 0.033
66 0.001 0.062
67 -0.015 0.020
68 -0.020 0.006
69 -0.003 0.027
70 -0.009 0.016
71 -0.011 0.039
72 -0.010 0.021
73 -0.013 0.018
74 -0.015 0.016
75 -0.023 0.038
76 -0.010 0.027
77 -0.003 0.028
78 -0.015 0.000
79 -0.014 0.020
80 0.002 0.022
81 -0.012 0.006
82 0.001 0.024
83 0.000 0.039
84 -0.006 0.039
85 0.006 0.037
86 -0.009 0.040
87 -0.015 -0.003
88 -0.006 0.016
89 -0.009 0.030
90 -0.012 0.009
91 0.006 0.035
92 -0.004 0.025
93 -0.006 0.066
94 -0.009 0.005
95 -0.015 0.013
96 -0.001 0.025
97 -0.016 0.011
98 -0.006 0.039
99 0.003 0.048
100 -0.017 0.003
Only the first 100 repetitions are displayed on this worksheet.
Data!$AG$23 Notes
Average 0.023 1 0.02
SD 0.0165 SDErrorES 10
Max 0.114 -15
Min -0.007
Histogram of Data!$M$23 And Data!$AG$23
Data!$M$23
Data!
$AG$23
-0.0125 0.0075 0.0275 0.0475 0.0675 0.0875 0.1075

Data!$M$2 Data!$AG$23
-0.0325 -0.0325 0 0
-0.03 -0.0325 1 0
-0.0275 -0.03 1 0
-0.025 -0.03 1 0
-0.0225 -0.0275 1 0
-0.02 -0.0275 4 0
-0.0175 -0.025 4 0
-0.015 -0.025 11 0
-0.0125 -0.0225 11 0
-0.01 -0.0225 24 0
-0.0075 -0.02 24 0
-0.005 -0.02 40 0
-0.0025 -0.0175 40 0
0 -0.0175 72 0
0.0025 -0.015 72 0
0.005 -0.015 109 0
0.0075 -0.0125 109 0
0.01 -0.0125 126 0
0.0125 -0.01 126 0
0.015 -0.01 159 0
0.0175 -0.0075 159 0
0.02 -0.0075 141 4
0.0225 -0.005 141 4
0.025 -0.005 92 6
-0.0025 92 6
-0.0025 81 18
0 81 18
0 52 33
0.0025 52 33
0.0025 32 37
0.005 32 37
0.005 19 49
0.0075 19 49
0.0075 15 67
0.01 15 67
0.01 3 69
0.0125 3 69
0.0125 6 76
0.015 6 76
0.015 9 79
0.0175 9 79
0.0175 2 72
0.02 2 72
0.02 0 76
0.0225 0 76
0.0225 1 42
0.025 1 42
0.025 0 46
0.0275 46
0.0275 53
0.03 53
0.03 40
0.0325 40
0.0325 32
0.035 32
0.035 36
0.0375 36
0.0375 33
0.04 33
0.04 28
0.0425 28
0.0425 11
0.045 11
0.045 9
0.0475 9
0.0475 20
0.05 20
0.05 10
0.0525 10
0.0525 7
0.055 7
0.055 7
0.0575 7
0.0575 11
0.06 11
0.06 6
0.0625 6
0.0625 3
0.065 3
0.065 4
0.0675 4
0.0675 1
0.07 1
0.07 2
0.0725 2
0.0725 1
0.075 1
0.075 3
0.0775 3
0.0775 2
0.08 2
0.08 1
0.0825 1
0.0825 0
0.085 0
0.085 1
0.0875 1
0.0875 0
0.09 0
0.09 1
0.0925 1
0.0925 0
0.095 0
0.095 1
0.0975 1
0.0975 1
0.1 1
0.1 0
0.1025 0
0.1025 0
0.105 0
0.105 0
0.1075 0
0.1075 1
0.11 1
0.11 0
0.1125 0
0.1125 1
0.115 1
0.115 0
Q&A for SimEq.xls
1) In the Data sheet, set 1 = - 20. Run a Monte Carlo simulation to approximate the sampling distribution of
the OLS estimate of 1.
Is OLS biased? Explain.
2) If SD(ES) = 0, then OLS is OK. What about CR? Change SD(CR) to zero and determine the effect this has on the
sampling distribution of g1.
Describe your procedure and explain your results.
3) What role does 2 play in the sampling distribution of g1? Does it have any effect?
Describe your procedure and explain your results.
Use the hypothetical DGP of the classic supply and demand model below to answer the Chapter 24 Exercises.
Data Generation Process

D D S S
Q i = 0 + 1 Pi + i Qi = 0 + 1 Pi + 2 F+ i
100 50
-50 1
SDErrorD 10 0.01
SDErrorS 1
Observation F QD Error QS Error P Q

distribution of g1,
e effect this has on the
er 24 Exercises.
Abbreviations:
Q quantity
D demand
S supply
P price
F number of firms
Bureau of Justice Statistics

Sim Eq

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Sim Eq

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Intro to SimEq.

Other sheets include:

bias resulting from OLS

have documentation on the data.

27 #VALUE! #VALUE! #VALUE!

Applying the 2SLS Estimates

Histogram of Data!$M$23 And Data!$AG$23

-0.0125 0.0075 0.0275 0.0475 0.0675 0.0875 0.1075

Data Generation Process

Observation F QD Error QS Error P Q

e effect this has on the

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