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I am trying to estimate the simultaneous equations model with instruments in STATA.

I have two equations such as:

inflation = expected_inflation + output_gap + oil_price + gas_price
output_gap = expected_gap + exchange_rate + interest_rate + oil_price + gas_price

I assume that oil and gas prices are exogenous and want to instrument them by its lags.

I guess I should use code like this:

reg3 (inf exp_inf gap oil gas) (gap exp_gap real_i reer oil gas), inst(oil gas)

However it gives me an error:

Equation is not identified -- does not meet order conditions

Do you have any ideas what should I do?

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  • $\begingroup$ "I assume that oil and gas prices are exogenous and want to instrument them by its lags." Perhaps you meant "endogenous" and "their lags"? $\endgroup$
    – Richard Hardy
    Commented Jan 30, 2016 at 10:17
  • $\begingroup$ I hope my answer makes sense as well, doesn't it? $\endgroup$
    – Richard Hardy
    Commented Jan 30, 2016 at 12:27
  • $\begingroup$ Exactly. It was too few instruments, that is why it did not work. However, finally I run it in Eviews, not in Stata. Thanks a lot ! $\endgroup$
    – Puma06
    Commented Jan 30, 2016 at 17:08

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I don't work with Stata, but I tried reading the manual for the function reg3 and here is what I think.

Based on the manual, it seems that you should list all the exogenous regressors within inst( ); however, you list only two. Stata will interpret this as if all the other variables are endogenous. Then there are too many endogenous variables and too few instruments for the system to be estimated by three stage least squares (3SLS), hence the error message.

Also, I am not sure whether specifying inst(oil gas) makes Stata use lags of oil and gas as instruments.

Here is a related thread in Stata forum, it arrives to a similar conclusion.

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