Causal implications: The linkage between time series and econometric modelling

Construction of causally and structurally adequate simultaneous equations models can be accomplished by determining causal relations between potential variables and balancing these statistically derived inferences with economic theory to relate behavioural or technological forces among the variables. An appropriate lag structure for each of the equations can be determined by a two step multiple transfer function approach involving reduced form equations. Testing the specification of already existing simultaneous equations models is done by constructing multiple transfer function models of the reduced form equations of the simultaneous equations models which permit incorporation of lead cross correlations.