Econometric Specification

Abstract

In this chapter we present the econometric specification of the general functional form presented in section 5.5 of the previous chapter. As a first step towards estimation, we further simplify this specification in order to deal with the fact that it is nonlinear in its parameters. Next we introduce stochastic elements such that the resulting models may be identified with the constrained models first presented in Chapter 4. In the sections following the stochastic specification we develop the econometric specification and estimation methods to be used for four different forms of the general specification. These four forms correspond to the cases where we do, or do not, introduce dynamics and/or trends in the equations. Notably in section 6.4 a stepwise estimation procedure is proposed starting from three possibly differing specifications for the covariance matrix of the residuals. This estimation procedure may be used for all four different forms of the model, either directly or slightly modified. In the last section we summarize and draw some conclusions.