Dear all,
I wonder if you could please help me with the following issue.
I am considering two variables P and M in dicrete time which are linked by the following equations:
P(t) = b0 + b1* P(t-1) + b2*P(t-7) + b3*M(t) + b4*M(t-1) + b5*D(t) + U(t)
M(t) = ao + a1* M(t-1) + a2*M(t-7) + a3*P(t-1) + a4*D(t) + V(t)
D is an exogenous variable that affects both P and M; U and V are error terms.
* The point of confusion is that P depends not only on lagged values of M but also on its current value.
Could I still consider the evolution of the vector (P(t), M(t)) as a VAR process? How could I estimate the parameters?
Thank you very much in advance for your help.
Nikos
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