Simultaneous Equation Models use Two-Stage Lease Squares Regression to analyze circular causality.

  • The two dependent variables with circular causality is
  • are caused respectively by
  • cause both . The equation is thus:

The process for regression is same as the Two-Stage Lease Squares Regression:

  1. For the first equasion :
    1. First stage: regress without :
2. Second stage: regress $Y_{1}$ againt $\hat{Y_{2}}$ (the original equation):
  1. Perform the same 2SLS regression for the second equation as well