Bayesian Multivariate Exogeneity Analysis: An Application to a UK Money Demand Equation

Mark F.J. Steel, Jean-Francois Richard
Tilburg University, Duke University

Nov 30 1989

We propose a general Bayesian Instrumental Variables technique for investigating the weak exogeneity of a set of variables relative to the coefficients of a single structural equation of interest. We use a so-called Recursive Extended Natural Conjugate prior distribution for the nuisance parameters, which consist of the coefficients of the auxiliary instrumental variables equations. Such priors can accommodate arbitrary linear restrictions so that a specific (parsimonious) set of instruments can be associate with teach individual variable the exogeneity of which is under scrutiny. An application of our methodology to a UK money demand equation leads to the conclusion that price and interest rate are jointly weakly exogenous throughout the sample period.


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