Slide 1

INTRODUCTION

CLRM, GLRM and SUR models make the following assumption: The error term is uncorrelated with each explanatory variable.

1PurposeWhy SES?To investigate the importance of FDI for economic growth in IndiaTime period: 1999-00 to 2011-12

Bi directional connection between FDI and economic growth Incoming FDI stimulates economic growth and in its turn a higher GDP attracts FDI ModelGrowth = a1 + a2*(GCFC) + a3*(FDI) + a4*Export + a5*Labor FDI = b1 + b2*Growth + b3*GCFC + b4*(Wage) GCFC = c1 + c2*FDI + c3*Growth + c4*M3 Export = d1 + d2*Growth + d3*EXRATE + c4*GCFCReference: FDI and Economic Growth - Evidence from Simultaneous Equation Models, G Ruxanda, A Muraru - Romanian Journal of Economic Forecasting, 2010.http://www.ipe.ro/rjef/rjef1_10/rjef1_10_3.pdfClassification of VariablesEndogenous : Growth rate of GDP, Gross fixed capital formation, Exports, FDI

Exogenous : Growth rate of labour, Wage, Exchange rate, M3 money base growthIdentificationM - No. of excluded exogenous explanatory variablesN * - No. of included endogenous explanatory variables

First equation : M - Wage, Exchange rate, Deviation of M3 N * - Gross fixed capital formation, FDI, Exports M = N * = 3 => Exactly IdentifiedSecond Equation : M - Labour growth, Exchange rate, Deviation of M3 N * - GDP growth rate, Gross fixed capital formation M (3) > N * (2) and hence overidentified

Third Equation : M - Labour growth, Exchange rate, Wage N * - GDP growth rate, FDI M (3) > N * (2) and hence overidentified

Fourth Equation: M - Labour growth, Deviation of M3, Wage N * - GDP growth rate, Gross fixed capital formation M (3) > N * (2) and hence overidentified

Estimation of the ModelWhy not OLS ? Correlation between the random error and endogenous variableOLS estimator biased and inconsistentOne situation in which OLS is appropriate is recursive model

OLS EstimationGROWTH EQUATIONVariableLabelDFParameterEstimateS.EtValuePr>|t|InterceptIntercept1-44.576213.301-3.350.0016GCFCGCFC114.289333.74733.810.0004FDIFDI1-0.629650.5258-1.200.2372ExportExport10.998982.59200.390.7017LaborLabor19.315659.00541.030.3062FDI EQUATIONVariableLabelDFParameterEstimateS.EtValuePr>|t|InterceptIntercept1-8.817742.14275-4.120.0002GrowthGrowth1-0.037320.03527-1.060.2953GCFCGCFC12.448400.717523.410.0013WageWage11.211120.310253.900.0003proc syslin data = sasuser.Consa 2sls reduced; endogenous Growth GCFC FDI Export; instruments Labor Wage M3 EXRATE; First: model Growth = GCFC FDI Export Labor; Second: model FDI = Growth GCFC Wage; Third: model GCFC = FDI Growth M3; Fourth: model Export = Growth EXRATE GCFC; run;OLS EstimationGFCF EQUATIONVariableLabelDFParameterEstimateS.EtValuePr>|t|InterceptIntercept12.865000.2520511.37