[R] Question on Simultaneous Equations & Forecasting

[Berend Hasselman]

Frances,

I would not advise Gauss-Seidel for non linear models. Can be quite tricky, slow and diverge.

You can write your model as a non linear system of equations and use one of the nonlinear solvers.
See the section "Root Finding" in the task view NumericalMathematics suggesting three packages (BB, nleqslv and ktsolve). These package are certainly able to handle medium sized models.
(https://cran.r-project.org/web/views/NumericalMathematics.html)

Write a function with the system of equations with each equation written as 

 y[..] <- lefthandside - (righthandside)

You can then include identities naturally.

You would have to make the model dynamic but that shouldn't be too difficult using vector indexing.

Berend Hasselman

> On 13 Jul 2017, at 10:06, Pfaff, Bernhard Dr. <Bernhard_Pfaff at fra.invesco.com> wrote:
> 
> Hi Frances,
> 
> I have not touched the system.fit package for quite some time, but to solve your problem the following two pointers might be helpful:
> 
> 1) Recast your model in the revised form, i.e., include your identity directly into your reaction functions, if possible.
> 2) For solving your model, you can employ the Gauß-Seidel method (see https://en.wikipedia.org/wiki/Gauss%E2%80%93Seidel_method).
> This has not only the advantage of generating forecasts, in terms of your exogenous variables, but you can also compute 'dynamic ex post' forecasts. This is probably the most powerful testing for dynamic simultaneous equation systems, given that you provide only your predetermined variables as starting values and then apply the Gauss-Seidel method (recursively) in-sample. The progressions of your endogenous variables should then not depart too much from your observed in-sample endogenous variables, i.e., you are assessing the stability of your model. Because forecast-errors cumulate over time in a dynamic ex-post forecast, this is a rather good and stringent model-test.
> 
> Incidentally, when you use simultaneous equation models on a larger scale (say, between 200-300 equations, like medium-sized macroeconomic models), the only route to go for, is by estimating your reaction equations separately and then putting all your pieces - including identities and/or technical equations - together in a format suitable for applying the Gauss-Seidel method. Hence, forget about 2SLS or 3SLS and Haavelmo-bias.
> 
> Best wishes,
> Bernhard   
> 
> -----Ursprüngliche Nachricht-----
> Von: R-help [mailto:r-help-bounces at r-project.org] Im Auftrag von OseiBonsu, Frances
> Gesendet: Mittwoch, 12. Juli 2017 22:36
> An: r-help at r-project.org
> Betreff: [EXT] [R] Question on Simultaneous Equations & Forecasting
> 
> Hello,
> 
> I have estimated a simultaneous equation model (similar to Klein's model) in R using the system.fit package.
> 
> I have an identity equation, along with three other equations. Do you know how to explicitly identify the identity equation in R?
> 
> I am also trying to forecast the dependent variables in the simultaneous equation model, while incorporating the identity equation in the forecasts. Is there a way to do this in R?
> 
> The only way that I have been able to forecast the dependent variables has been by getting the predictions of each variable, converting them to time series uni-variables, and forecasting each variable individually.
> 
> Any help would be appreciated.
> 
> Best Regards,
> 
> Frances Osei-Bonsu
> Summer Analyst, Research and Strategy
> LaSalle Investment Management
> 333 West Wacker Drive, Suite 2300, Chicago IL 60606 Email frances.oseibonsu at lasalle.com<mailto:frances.oseibonsu at lasalle.com>
> Tel +1 312 897 4024
> lasalle.com<http://www.lasalle.com/>
> 
> 
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