Bayesian specification analysis and estimation of simultaneous equation models using Monte Carlo methods

Bayesian procedures for specification analysis or diagnostic checking of modeling assumptions for structural equations of econometric models are developed and applied using Monte Carlo numerical methods. Checks on the validity of identifying restrictions, exogeneity assumptions and other specifying assumptions are performed using posterior distributions for discrepancy vectors and functions representing departures from specifying assumptions. Several mappings or functions of reduced form coefficients are defined and their posterior distributions are computed. A restricted reduced form approach is used to compute posterior distributions for structural parameters. These procedures are applied in analyses of two econometric models.