Extending Instrumental Variable Method for Effective Economic Modelling

摘要

Economic modeling that yields practical value must cater for effects caused by exogenous variables. AutoRegressive eXogenous approach (ARX) has been widely used in regional economic studies. Instrumental Variable Method is regarded as a preferential method to parametric estimation in ARX modeling. However, traditional instrumental variable methods can only handle single variable which has limited its capability. This paper presents an extended instrumental variable method (EIVM) which is based on multiple variables. This provides the capability of taking into account of exogenous variables and reflects better the economic activities. A case study is conducted, which illustrates the application of the EIVM in modeling Northeastern economy in China.