Example 193

Demand function: Qt = a0 + a1Pt + a2It + u1t (19.2.12)

Supply function: Qt = 00 + 01Pt + 02P—1 + u2t (19.2.22)

Given that Pt and Qt are endogenous and It and P—1 are predetermined, Eq. (19.2.12) excludes exactly one variable P—1 and Eq. (19.2.22) also excludes exactly one variable 11. Hence each equation is identified by the order condition. Therefore, the model as a whole is identified.

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