Forecast errors in Structural Equation Models can be analyzed by using a stochastic simulation in which the structural disturbances are given values with specified stochastic properties. Moreover, a performance measure (i.e. objective-function) is assigned to an econometric model, depending on the value of forecasted endogenous variables; thus, analysts try to enhance this measure by fine-tuning exogenous variables (i.e. the instruments) of the model (e.g. policy analysis). In this post, I show how to complete these analyses in R.

Simultaneous equation models are a type of statistical model in the form of a set of linear simultaneous equations. They are often used in econometrics. In this article the bimets R package estimation and simulation capabilities will be used.