1905702

Multiple Regression for Systems of Equations
Author(s): Gerhard Tintner

Source: Econometrica, Vol. 14, No. 1 (Jan., 1946), pp. 5-36
Published by: The Econometric Society
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MULTIPLE REGRESSION FOR SYSTEMS OF EQUATIONS*t

By
GERHARD TINTNER
1. THE PROBLEM
It has been apparent that the classical method of least-squares

fitting of single equations in a system of economic equations leads frequently to unsatisfactory results. (But it is perfectly adequate for prediction.) The reason for this is that the actually observed economic
variables are really jointly determined by all the equations in the system and not, in general, by a single one of them. For instance, the
prices and quantities actually established on a market are determined
by the intersection of the demand and supply curves. This was already
recognized early in connection with empirical work dealing with demand function, for instance, by Frisch' and E. Working.2 A systematic
treatment of the problem in terms of modern statistical ideas is due to
Haavelmo.3 Klein,4 Koopmans, Marschak,6 Wald,7 and Smith8 made
important contributions.
* The author is much obliged to 0. H. Brownlee (Ames), W. G. Cochran
(Ames), H. Hotelling (Columbia), L. Hurwicz (Chicago), L. R. Klein (Chicago),
J. Marschak (Chicago), T. Koopmans (Chicago), A. Wald (Columbia), and F. V.
Waugh (Washington) for advice and criticism.
t Journal Paper No. J-1344 of the Iowa Agricultural Experiment Station,
Ames, Iowa, Project No. 40-62-730.
1 R. Frisch, Pitfalls in the Statistical Constructionof Demand and Supply Curves,
Veroffentlichungen der Frankfurter Gesellschaft fur Konjunkturforschung. Neue
Folge, Heft 5, Leipzig, 1933, 39 pp.
2 E. J. Working, "What Do Statistical Demand Curves Show," Quarterly
Journal of Economics, Vol. 41, February, 1927, pp. 212 ff.
I T. Haavelmo, "The Statistical Implications of a System of Simultaneous
Equations," ECONOMETRICA, Vol. 11, January, 1943, pp. 1-12; "The Probability
Approach in Economics," ibid., Vol. 12, Supplement, July, 1944, 118 pp.
4L. R. Klein, "Pitfalls in the Statistical Determination of the Investment
Schedule," ECONOMETRICA, Vol. 11, July-October, 1943, pp. 246-258.
5 T. Koopmans, "Statistical Estimation of Simultaneous Economic Relations,"
Journal of the American Statistical Association, Vol. 40, December, 1945, pp. 448466.
6 J. Marschak, "Economic Interdependence and Statistical Analysis," in Studies in Mathematical Economics and Econometrics, In Memory of Henry Schultz,
Chicago, 1942, pp. 135-150; (with W. H. Andrews) "Random Simultaneous
Equations and the Theory of Production," ECONOMETRICA, Vol. 12, July-October, 1944, pp. 143-205.
7H. B. Mann and A. Wald, "On the Statistical Treatment of Linear Stochastic
Difference Equations," ECONOMETRICA, Vol. 11, July-October, 1943, pp. 173220.
8 J. H. Smith, "Weighted Regressions in the Analysis of Economic Series," in
Studies in MathematicalEconomicsand Econometrics,In Memoryof Henry Schultz,
pp. 151-164.
ID

GGERHARD TINTNER
Many of the authors following Haavelmo suggested the introduction

of stochastic or error terms on the right-hand side of the theoretical
equations of the contemplated system. We propose here a somewhat
different approach and will also show that both lines of attack are really
special cases of a more general method of solution which has not yet
yielded to statistical analysis.
In the following we propose to deal with systems of economic equations. But it is not unlikely that our methods may be applicable in other
fields, especially in the case of certain biological problems.
We will first give an economic theoretical justification of our method,
then sketch the statistical procedures implied. After this we will deal
with the troublesome question of meaningful economic relationships
(identification) and then indicate tests of significance. Finally we will
give an application to agricultural data.
2. THEORETICAL
JUSTIFICATION
In order to clarify our ideas we will first assume the existence of a

complete static Walrasian system:
(1)
G(zi(Z Z2, ..
IZQ)
=0,
i =1, 2,
,q
<
Q.
We have here q equations in Q> q variables zj. We can imagine that

these equations determine completely the q economic variables
Zq. These can be interpreted as all the prices, al the inZl, Z2, * *
terest rates, all quantities of commodities exchanged and produced,
wages, etc.
Apart from these q variables we have also Q-q parameters
ZQ+i, - - *, ZQ. These parameters exert an influence on the system but
are themselves independent of the variables zi, Z2, - - *, Z,. They are,
for instance: technological coefficients, institutional data like income
distribution or property of factors of production, periods of payment,
noneconomic variables like the weather, etc. It will frequently depend
upon the exact nature of the system considered which variables will
fall into the first and which into the second category. One important
consideration is the distinction between short-term and long-term systems. Fixed capital for instance will belong to the second category in
the short run but to the first in the long run.
The equations (1) are derived by some assumption of "rational" behavior, i.e., the striving for maximum profit or utility. We will disregard
here the problem of the existence of economically significant solutions
for our system which has been discussed by von Neumann9 and Wald.10
9 J. von Neumann, "Ueber ein 6konomisches Gleichgewichtssystem und eine
Verallgemeinerung des Brouwerschen Fixpunktsatzes," Ergebnisse eines mathematischen Kolloquiums, Heft 8, 1935-36, pp. 73 ff.

MULTIPLE
REGRESSION
FOR SYSTEMS
OF EQUATIONS
Stability conditions will also be taken as fulfilled. It should be mentioned that Leontief" has recently attempted to verify such static systems in a somewhat simplified form.
We can also consider system (1) as representing a nonstatic Walrasian system of general equilibrium. Anticipations have then to be
introduced. Such ideas have been treated extensively by Hicks12 and
recently by Lange.'3 The present author has shown that the assumption
of specific routines of anticipations leads to "dynamic" terms in the
equations (1).14 This is similar to procedures adopted earlier by Evans'5
and Roos.'6 That is to say, some of the zi in (1) have now to be interpreted as referring to different points in time, as derivatives with respect to time, integrals, etc.
It seems to us that such an approach is similar to the one implied in
certain mathematical business-cycle theories, especially those of Tinbergen,'7 Kalecki,'8 Davis," and the author.20 Empirical verifications
are available in the extensive work of Tinbergen2l and also on a much
smaller scale in a publication by the author of this article.22
It has already been pointed out by Pareto2' and emphasized by later
writers24that the labor of determining empirically the system (1) would
10 A. Wald, "Ueber einige Gleichungssysteme der mathematischen Oekonomie,"
Zeitschriftfir Nationalokonomie, Vol. 7, 1936, pp. 637-670.
11 W. Leontief, The Structure of American Economy, 1919-1929, Cambridge,
Mass., 1941, 181 pp.
12 J R. Hicks, Value and Capital, Oxford, 1939, 331 pp.
13 0. Lange, Price Flexibility and Employment, Bloomington, Ind., 1944, 114 pp.
1 G. Tintner, "A Contribution to the Nonstatic Theory of Production," in
Studies in MathematicalEconomicsand Econometrics,In Memoryof Henry Schultz,
pp. 92-109, esp. pp. 106 ff.; "A Contribution to the Non-Static Theory of
Choice," QuarterlyJournal of Economics, Vol. 56, February, 1942, pp. 274-306,
esp. pp. 302 ff.
1"G. C. Evans, Mathematical Introduction to Economics, New York, 1930,
pp. 36 ff.
18 C. F. Roos, Dynamic Economics, Bloomington, Ind., 1934, pp. 14 ff.
17 J. Tinbergen, "Annual Survey: Suggestions on Quantitative Business Cycle
Theory," ECONOMETRICA, Vol. 3, July, 1935, pp. 241-308.
18 M. Kalecki, Essays in the Theory of Economic Fluctuations, London, 1935;
Studies in Economic Dynamics, New York, 1944.
19 H. T. Davis, The Theory of Econometrics, Bloomington, Indiana, 1941,
pp. 408 ff.
20 G. Tintner, "A 'Simple' Theory of Business Fluctuations," ECONOMETRICA,
Vol. 10, July-October, 1942, pp. 317-320.
21 J. Tinbergen, Business Cycles in the United States, 1919-32, Geneva, 1939.
22 G. Tintner, "The 'Simple' Theory of Business Fluctuations: A Tentative
Verification," Review of Economic Statistics, Vol. 26, August, 1944, pp. 148-157.
23 V. Pareto, Cours d'gconomiepolitique, Vol. 2, Lausanne, 1897, pp. 364 ff.
24 F. A. von Hayek, "The Present State of the Debate" in CollectivistEconomic
Planning, London, 1935, pp. 201-243, esp. pp. 207 ff.

GERHARD
TINTNER
be prohibitive because of the great number of variables actually entering into such a system of general equilibrium. This is true even if observations for all the z; were available which is certainly not the case.
Hence we are forced to investigate the possibilities of simplification.
In economic theory, such simplified models have very often been constructed. Fisher's famous equation of exchange25can be considered as
a very simplified model of the complete Walrasian system. This assumes of course that this equation or the corresponding "Cambridge"
equation is not a mere tautology. The equations in Keynes's earlier
Treatise26are of a similar nature. Many other models have been constructed, some of which are represented in Lundberg's book.27 Keynes's
General Theory28can be thought of as a simplified model of the Walrasian system. It is mathematically formulated in the articles by
Hicks,2"Lange,30and Modigliani,3' to mention only a few. We want to
proceed along similar lines.
We replace a certain subset of the variables and parameters
Z1, Z2, . . *, ZQ by one new variable Mh (h=l1, 2, * * *, p). p is now
a much smaller number than Q. At the same time we reduce the number of equations in the system.
The substitution of Mh for a subset of our original variables and
parameters amounts to the following: We replace for instance the various wheat prices by one representative wheat price or by the average
of all wheat prices. We replace the quantities of all the producers' goods
in the system (like iron, coal, copper, etc.) by an index of the quantity
of producers' goods. We replace the various short-term interest rates
by one representative short-term rate or by the average of all shortterm rates, etc. Time will probably also enter explicitly into our equations.
After replacing subsets of the original variables and parameters in
(1) by the new set of variables M1, M2, * * * , Mp we may still have
variables that are not represented. Write w for a new variable which
stands for those variables which lack representation.
25
I. Fisher, The Purchasing Power of Money, New York, 1911.
M. Keynes, A Treatise on Money, New York, 1930.

E. Lundberg, Studies in the Theory of Economic Expansion, London, 1937.
J. M. Keynes, The General Theory of Employment, Interest and Money,
26 J.
27
28
London, 1936.
29 J. R. Hicks, "Mr. Keynes and the 'Classics'; A Suggested Interpretation,"
ECONOMETRICA,
Vol. 5, April, 1937, pp. 147-159.
30 0. Lange, "The Rate of Interest and the Optimum Propensity to Consume,"
Economica, Vol. 5, New Series, February, 1938, pp. 12-32.
31 F. Modigliani, "Liquidity Preference and the Theory of Money," ECONOMETRICA, Vol. 12, January, 1944, pp. 45-88. See also D. M. Fort, "A Theory of
General Short-Run Equilibrium," ECONOMETRICA, Vol. 13, October, 1945, pp.
293-310.

MULTIPLE
REGRESSION
FOR SYSTEMS
OF EQUATIONS
Assume that we have now R equations in our simplified system

(R <p):
R < p.
i = 1, 2,
(2)
Hi(Mly M2,
Mp) w) = O,
The new functions Hi need not be of the same type as the Gi in (1).
In these equations we have replaced the Q original variables z; by the
p+ 1 new variables Ma, w.
Admittedly, there is no unique or "best" way in which the transition
from the micro-economic system (1) to the macro-economic (2) can be
made. Our approach however permits the statistical comparison of various alternative systems. A purely statistical superiority need not be
considered decisive if the system is not economically meaningful.
The crucial question is: In what way will the new variables Ma differ
from the original ones? There will be a number of sources of deviations.
(a) Lack of representativeness: We cannot expect the single variable Ma to represent the subgroup of variables (or parameters) in the
original system perfectly. A general price index will, e.g., give only an
imperfect representation of all the prices in system (1),32 etc.
(b) Frictions: The Walrasian system (1) was derived under the assumption of perfect rationality or an equivalent assumption. Frictions
will frequently prevent the achieving of results yielding maximum utility or profits. This has been indicated by the author in a previous
article.33 For instance a monopolist may produce either more or less
than the quantity which would yield maximum profits because of difficulties of management, ignorance of the true conditions of demand and
cost, etc. These deviations arise with the zi as well as with the Ma.
If we replace finally our "theoretical" variables Mi by the actually
observed ones Xi we have another source of deviation:
(c) Errors of measurement in the strict sense: Our empirical data
will frequently be subject to considerable errors of measurement. Especially the quantities produced and consumed, national income, etc.
are very imperfectly known.
It does not seem to be unreasonable to assume that all these deviations or disturbances (Frisch)34are of a stochastic nature. That is to
say, we will regard the theoretical variables Mi which enter into our
system as the mathematical expectations of the empirical variables Xi
which are actually observed and constitute our data. A similar assumption has been made in another context by 0. Anderson.35
32
33
G. Haberler, Der Sinn der Indexzahlen, Tilbingen, 1927, pp. 125 ff.
G. Tintner, "A Note on Economic Aspects of the Theory of Errors in Time
Series," Quarterly Journal of Economics, Vol. 53, November, 1938, pp. 141-149.
31 R. Frisch, Statistical Confluence Analysis by Means of Complete Regression
Systems, Oslo, 1934, pp. 47 fif.

33 0. Anderson, "Ist die Quantitatstheorie statistisch nachweisbar?" Zeitschrift
fuir Nationaloikonomie,Vol. 2, 1931, pp. 523 if., esp. pp. 539 if.

10
GERHARD
TINTNER
The economic meaning of the assumption that the Mi are the mathematical expectatiQns of the observed variables Xi is the following: We
assume that in the long run the averages (arithmetic means) of the disturbances or deviations mentioned above tend to be zero. The consequences are not very serious if this assumption should not be strictly
fulfilled. The resulting bias will only influence the constant terms if
we consider linear systems, as we propose to do later. The more important regression coefficients (which represent, for instance, elasticities),
are not affected. Since we are primarily interested in the estimation of
these coefficients we may assume that the biases will not impair the
significance of our results considerably, even if they should exist.
Write Xit for the actual observation of the theoretical variables Mi
at the point in time t. Our observations extend over the period
t=l, 2,**,
N.
We have;
(3)
Xit -Mit
+ Yit)
i =
1, 2, ..,
p; t-=1, 2, ..,
N.
We have by definition Mt = EXi. Mit is the mathematical expectation or systematic part and yit the random term or the disturbance
(Frisch). These disturbances result from lack of representation, frictions, and errors of measurement as indicated above. The last term
may be absent with some of the variables, especially the one representing time. The mathematical expectations are not random variables. We
will also assume that the term wt (t= 1, 2, * * * , N) which stands for the
variables not represented in the system is random, with Ewt =0. It is
also possible that sometimes some kinds of frictions may give rise to
this type of stochastic terms.
Now we finally assume the system (2) linear in first approximation.
p
(4)
k,o + Z
k,jM2t = w,t,
v = 1, 2,
.,
R; t=1,
2,
, N.
j=1
We would like to mention here that our purpose is not prediction

but estimation of the structural coefficients k,j themselves (Wald).36
Their importance for economic policy has been stressed by Haavelmo.37
Our system is theoretically a representation of the complete Walrasian
system but the individual equations are not yet meaningful in an economic sense. That is to say, we cannot in general interpret the individual (normalized and orthogonalized) relationships (4) as economically
meaningful functions, e.g., demand functions, supply functions, etc.
36 A. Wald, "The Fitting of Straight Lines if Both Variables are Subject to
Error," Annals of MathematicalStatistics, Vol. 11, September, 1940, pp. 284-300.
37 "The Statistical Implications of a System of Simultaneous Equations,"
cited in note 3.

MULTIPLE
REGRESSION
FOR SYSTEMS
11
OF EQUATIONS
This problem, the so-called question of "identification," will be taken

up later.
A general theory would require the treatment of the system (4) under
specific assumptions regarding all the various terms entering into it,
i.e., especially the wit in addition to the Mit and yit. Actually, the statistical problem of estimation under these very general conditions is
as yet not solved. There are, however, two different approaches available:
A. Assume the yit (disturbances) negligible compared with the wit.
Then we get the stochastic systems studied by Haavelmo and his
school.
B. Assume the wit negligible. That is to say, assume that the chosen
variables Xit represent the total economic system well enough so that
the disturbances yit are actually responsible for all or nearly all the
deviations. This is the approach which will be presented in this paper.
We are now forced to make some additional assumptions, some of
which are necessary in any case and others of which are made only for the
sake of convenience. A complete mathematical treatment of the problem of estimation under somewhat less stringent conditions is given
elsewhere.38
First we neglect the term w,t in (4) and will only try to estimate the
k, in the system:
p
(5)
ka + k,ktMit = O,
v = 1,2, .. * ,R; t = ly,2,
N.
This assumption is permissible only if we feel reasonably certain that

the most important variables pertinent to our system have been represented and that the influence of variables and parameters z; which are
not represented by the Ma is negligible. In other words, the equations
(5) would give a perfect fit without any deviations were it not for the
disturbances discussed above.
The linear form of the equations, which has been assumed as a first
approximation, may also create difficulties. Sometimes we may assume
our system as linear in the logarithms, especially in the case of production functions (Douglas).3 Certainly, the assumption of linearity will
be justified in a small region around the equilibrium. More complicated systems, would include, for instance, squares, cubes, etc., or orthogonal polynomials as variables in (5). Some of the assumptions given
38 G. Tintner, "A Note on Rank, Multicollinearity and Multiple Regression,"
Annals of MathematicalStatistics, Vol. 16, September, 1945, pp. 304-308.
39 P. H. Douglas, Theoryof Wages, New York, 1934, pp. 113 ff., and subsequent
publications.

12
GERHARD
TINTNER
below would have to be slightly modified in consequence, especially the

one referring to independence of the disturbances.
It is clear that the yit (disturbances) are statistically independent of
the Mit (systematic parts) and we assume that they are normally distributed. The second assumption is made chiefly for the sake of convenience. If, however, the disturbances discussed above are small and
very numerous, and some additional conditions regarding their higher
moments are fulfilled, then normality in large samples follows from the
Laplace-Liapounoff theorem.40Investigations into price dispersions, for
instance, indicate that actually the deviations from normality may not
be very great if we replace, e.g., a set of prices by a representative or
average price (Mills).41 This may not be true with other data, for instance incomes where skewness is very extensive.42 It may be necessary
in such cases to include specifically a measure of skewness, e.g., Pareto's
a as one of the variables. As far as deviations caused by errors of measurement are concerned, there is no reason to assume that they are not
normally distributed. The same seems to be true of those disturbances
which go back to frictional causes.
We assume further, that the yit have constant variance43 over the
period considered. The empirical estimate of this variance is designated
by Vi. This assumption is probably justified if we consider periods of
time that are not too long. The mathematical analysis would be very
much more complicated if the variances were changing over time. We
assume also that the yit are statistically independent of each other.
This assumption, which is here made only for the sake of convenience,
is probably not strictly justified. The complete theory of estimation has
been given elsewhere without this restriction.44
A very important assumption is the following: The systematic parts
of our variables (Mit) are "smooth" functions of time.45 We have not
to make more specific assumptions about the nature of these functions.
This excludes stochastic business-cycle theories, like, for instance,
Frisch's.46It is, on the other hand, compatible with the theories men40J. V. Uspensky, Introduction to Mathematical Probability, New York, 1937,
pp. 291 fl.
41 F. C. Mills, The Behavior of Prices, New York, 1927, pp. 251 ff.
42 H. T. Davis, The Theoryof Econometrics,pp. 26 ff.
43 G. Tintner, The Variate Difference Method, Bloomington, Indiana, 1940,
pp. 165 ff.
44 G. Tintner, "A Note on Rank, Multicollinearity and Multiply Regression,"
cited in footnote 38.
45 G. Tintner, The Variate Difference Method, pp. 31 ff. See also the review by
Tjalling Koopmans, Review of Economic Statistics, Vol. 26, May, 1944, pp.
105-107.
4 R. Frisch, "Propagation Problems and Impulse Problems in Dynamic Economics," Economic Essays in Honor of GustavCassel, London, 1933, pp. 171-205.

MULTIPLE
REGRESSION
FOR SYSTEMS
OF EQUATIONS
13
tioned above and also with the nonmathematical theories of the cycle.
There is one feature in nonstatic systems that may occasionally bring
about abrupt and sudden changes which may appear as discontinuities.
This is the "kink" in the (real or imagined) demand curve of the firm
under oligopoly. It implies a discontinuity in the marginal-revenue
curve. This was recently pointed out by Lange47 on the basis of the
earlier work of P. Sweezy.48 It does not seem, however, that these discontinuities are actually very large and that they are widespread in the
economic system. Continuity and momentum seem to us outstanding
characteristics of our economy.
The recent book by von Neumann and Morgenstern49 also stresses
discontinuities and indeterminacies arising in our economy from oligopolistic and similar situations. These are not unlike phenomena observed in games of strategy. But the actual determination of prices,
etc., under such conditions of indeterminacy may depend upon noneconomic factors like bargaining power, politics, etc. as in the much
discussed problem of bilateral monopoly.50 Hence it does not seem to
us that under normal conditions important discontinuities must necessarily arise, as long as the total social situation is reasonably stable.
It is important to note that the stochastic features of our system
are introduced only through the disturbances yit. Economically this is
equivalent to the following assertions: If we knew all our data perfectly
and if the system (1) was frictionless and represented perfectly "rational" behavior then the zi would appear as smooth (and predictable)
functions of time. This is not unlike the famous assertion of Laplace"
in classical mechanics.
Stochastic processes would appear only if assumption A above is
adopted or if we attempted to determine the complete system (4). This
would in some measure correspond to Frisch's business-cycle theory,52
the problem considered by Slutsky,53 the analysis of Hurwicz,54etc.
Lange, Price Flexibility and Employment, pp. 40 ff.
M. Sweezy, "Demand under Conditions of Oligopoly," Journal of Political Economy, Vol. 47, August, 1939, pp. 568-573.
49 J. von Neumann and 0. Morgenstern, Theory of Games and Economic Behavior, Princeton, 1944, pp. 43 if.
50 See, e.g., G. Tintner, "Note on the Problem of Bilateral Monopoly,"
Journal of Political Economy, Vol. 47, April, 1939, pp. 263-270, and the literature
quoted there, esp. p. 270.
51 P. S. de Laplace, Essai philosophique sur les probabilit6s, 4th ed., Paris, 1819,
p. 4.
52 R. Frisch, "Propagation Problems and Impulse Problems ...
," cited in
note 46.
53 E. Slutzky, "The Summation of Random Causes as the Source of Cyclical
Processes," ECONOMETRICA, Vol. 5, April, 1937, pp. 105-146.
54 L. Hurwicz, "Stochastic Models of Economic Fluctuations," ECONOMETRICA,
Vol. 12, April, 1944, pp. 114-124.
40 O.
48 P.

14
GERHARD
TINTNER
3. THE STATISTICAL
METHOD
A. Estimation
We give now a short description of our method. It deals essentially
with a case discussed by Frisch55and is in a sense an extension of the
work of Koopmans,56 who considered the existence of only one relationship existing between the Mit. This corresponds to the case R =1. The
methods presented here are also similar to the ones given by the author
in an earlier article.57 They are definitely connected with modern work
in multivariate analysis.58
Under the assumptions stated above we endeavor to estimate the
coefficients k, in equation (5). In order to do this we have first to
"estimate" R itself, i.e., the number of independent linear relationships
actually existing among our p variables Mit in the population.
The possibility of estimating the "true dimensionality" of our problem in statistical terms (a problem already envisaged by Frisch59 and
contemplated by Fisher60 and others in "discriminant analysis") distinguishes our approach from the one of Haavelmo and his followers.
These simply assume R, the number of independent linear relationships
between the variables in the population as given. Hence it seems possible that they may endeavor to accomplish too much, i.e., to determine a greater number of equations than actually exist in the data.
This would by necessity lead to nonsensical results. The reason for this
distinction between their method and our procedures lies in the different
role of economic theory and the reliance put into a priori assumed economic relationships, which seem to be greater with Haavelmo and his
school than with us.
a. Estimation of the Variances of the Disturbances. In order to estimate R we have first to estimate the variances of the disturbances yit.
Since we have assumed above that the Mit are smooth functions of
time we can use the variate difference method for this purpose. This
seems to us preferable because we do not have to assume that the systematic parts of our variables are specific functions of time, e.g., polyR. Frisch, Statistical ConfluenceAnalysis.
T. Koopmans, Linear RegressionAnalysis in Economic Time Series, Haarlem,
1937.
57G. Tintner, "An Application of the Variate Difference Method to Multiple
Regression," ECONOMETRICA, Vol. 12, April, 1944, pp. 97-113.
58 H. Hotelling, "Relations between Two Sets of Variates," Biometrika, Vol. 28,
December, 1936, pp. 321-377.
69 Statistical Confluence Analysis . . .,
cited in note 34. See also, R. Stone.
T'heAnalysis of Market Demand, London, National Institute of Economic and
Social Research, 1945.
60 R. A. Fisher, "The Statistical Utilization of Multiple Measurements," Annals of Eugenics, Vol. 8, 1938, pp. 376 ff.
55
56

MULTIPLE
REGRESSION
FOR SYSTEMS
OF EQUATIONS
15
nomials. It will be shown below that our procedures do not necessarily

depend upon the use of this method.
It has been shown elsewhere6' that we can proceed as follows: We
form the series of first, second differences, etc. of our original data Xit.
Then we compute the variances of these difference series. The Mit are
by assumption smooth functions of time. It follows that the portion
of the variance of the difference series of Xit which is due to this systematic part will become smaller and smaller the higher the order of
the difference. Eventually we shall be left substantially with the variance of the random terms yit alone. If this is true in the koth difference
series, it follows that, apart from sampling fluctuations, the variances
of the (ko+l)th difference series, of the (ko+2)th difference series, etc.
must be the same as the variance of the koth difference series if they
are all correctly computed. Test functions have been given elsewhere62
which serve to form an idea about the order of the difference series in
which this is the case, i.e., in which we probably are left with the variance of the random element alone. Then we may take the variance of
the koth difference series of Xit as an estimate of the population variance of the corresponding random element. It will be denoted by Vi.
But our procedures are by no means dependent upon the use of the
variate difference method. There are other ways of getting an estimate
of the variances of the random elements in our variables Xit. For instance we may compute orthogonal polynomials, Fourier series, etc. to
approximate the course of the systematic element Mit over time. Then
we take the residual variance computed from the deviations from these
"trends" as estimates of the variances of the random elements or disturbances in the population.
Sometimes we may even be able to assume the Vi a priori. This will
especially be the case if we can interpret the disturbances yit substantially as the results of errors of measurement or sampling. If modern
sampling methods are more frequently applied in economic data63 we
may often get an idea of the magnitude of the sampling error. But it
is not impossible to imagine that we know in some cases a priori the
relative accuracy of our data. It is for instance a well-known fact that
price data are frequently much more reliable than data on quantities
consumed, national income, etc.
f,. Estimation of the Number of Relationships. Having found in one
way or another estimates of the variances of the disturbances yit in
the population we can now utilize a very ingenious method due to
61 G. Tintner,
12
63
The Variate Difference Method.
Ibid., pp. 67 ff., 73 ff.

See, e.g., A. J. King and R. J. Jessen, "The Master Sample of Agriculture,"
Journal of the American Statistical Association, Vol. 40, March, 1945, pp. 38-56.

16
GERHARD
TINTNER
P. L. Hsu64in order to estimate R. This is equivalent to forming an idea

about the rank of the variance-covariance matrix of the Mit in the
population. For this and the following method of estimation of the k,1
we have to assume that we are dealing with large samples. Then our
estimates Vi are accurate enough to enable us to treat them as constants. They are assumed to be equal to the corresponding population
values. This assumption is necessary for our method and simplifies the
procedures greatly. It will, however, only rarely be strictly fulfilled in
practice and certain errors may appear in our estimates because of this
assumption. But these errors are essentially "errors of weighting" and
not likely to be always very important as Koopmans has shown.65
Hsu's method leads to the following procedure:
Consider the determinantal equation:
al
(6)
al2
. .
alp
XV1
a12
alp
a22 -XV2
.
.
a2
a2p
.
= O,
* * app - XVp
where ai is the sample covariance of Xit and Xit. That is to say,

where xit is the deviation of Xit from its
ai1=(Z:'=xitxit)/(N-1)
arithmetic mean Xi, etc. The Vi are our estimates of the random variances. They may of course be absent in the case of certain variables
that have no random term, especially the variable representing time
itself.
In the population equation corresponding to (6) there should be r
roots X= 1, if there are actually r independent linear relationships between the Mit in the population.
Let X1be the smallest root of equation (6), X2be the next smallest,
etc. These roots are best computed by Hotelling's66 methods. We form
the test function:
(7)
Ar = (N-
1)(Xl + X2 +
Xr)
i.e., the sum of the r smallest roots of (6) multiplified by (N - 1). This
quantity (7) is distributed like x2 with (N-I-p
+r) r degrees of freedom. It may be used to estimate R, i.e., the true number of independent
relationships of the type (5) which actually exist in the population.
The determinantal equation (6) is fundamental for our procedures.
64 P. L. Hsu, "On the Problem of Rank and the Limiting Distribution of
Fisher's Test Function," Annals of Eugenics, Vol. 11, 1941, pp. 39 fif.
66 T. Koopmans, Linear Regression Analysis
in Economic Time Series, pp. 87 ff.
6B H. Hotelling, "Simplified Calculation of Principal Components," Psychometrika, Vol. 1, March, 1936, pp. 27-35.

MULTIPLE
17
OF EQUATIONS
FOR SYSTEMS
REGRESSION
The number of degrees of freedom in the distribution of A,.will be interpreted later.

The following hypothesis will be tested: There are exactly r independent linear relations in the population between the Mit. Given a
level of significance, say 1 per cent, we will reject the hypothesis for a
A, which is larger than the one permitted for the given level of significance taken from the tables of X2with the appropriate number of
degrees of freedom. Hence we will compute the quantity (7) for
r= 1, 2, 3, * * - until we find a A,.which is larger than the one permissible under the conditions given above. The r corresponding to this A,
is to be taken as an estimate of the "true" number of relationships
existing in the population between the systematic parts of our variables.
This estimate will be denoted by R.
ay. Estimation of the Weighted Regression Coefficients.The method of
maximum likelihood for the estimation of the kIqleads under our assumptions to the method of least squares. Our estimates can then be
regarded as the best linear estimates in large samples and are unbiased
under the conditions stated. This follows from the above assumption
that the Vi can be treated as constants. Hence the Markoff theorem
applies.67 The sum of squares to be minimized is:
N
(8)
Q= E
E
t=1 i=1
(xt -M,t)2/V,
where mit is the deviation of Mit from its arithmetic mean. We have to
minimize Q under the R conditions (5).
These conditions involve actually Rp+R coefficients k,, (v=1,
2, * * , R; j=O, 1, 2, * * , N) which have to be estimated. The constants k,o are evidently given by the condition that the best fit has to
pass through the means of all the variables :68
p
(9)
kao+
v = ly 2, ..
k,ikXi = 0,
I R.
This still leaves Rp coefficients k,,1(v= 1, 2, * * * , R; j= 1, 2, * * * , p).

But it is evident that R2 of these coefficients are not really necessary.
Suppose we suppress in (5) the constants k,,oand substitute the deviations from the means mit for the variables Mit. Then we can, for in-
stance, express the first p-R variablesmit,

of the last R variables mpR+l, t, mpR+2, t,
only (p-R)R independent coefficients k,,.
. . .
m2t,
.
.,
Xmp-R
tin
terms
mpt. Hence we need
67 F. N. David and J. Neyman, "Extension of the Markoff Theorem on Least

Squares," Statistical Research Memoirs, Vol. 2, 1938, pp. 105 ff.
68 G. Tintner, "An Application of the Variate Difference Method to Multiple
Regression," op. cit., p. 105, formula (20).

18
GERHARD TINTNER
The f2 conditions imposed on the pR coefficients kq1(v= 1, 2, *.**, R;

, p) are as follows:
j=1, 2,
p
k,ikwiVi =
(10)
v, w = 1, 2, * *,
vw,,
i=l1
is the Kronecker delta. It is one for v = w and zero for v w.

where &vw
(11)
t=1
E ktjx1)
E3 i==l
( j=1
kwix1t) =
E
O,
v p w; v, w = 1, 2, *
, f.
These conditions (10) and (11) normalize and orthogonalize the coefficients klcv(v-1, 2, . * *, R; j= 1, 2, . . *, p).
The procedure is then essentially the same as weighted regression
with just one equation.69 We determine first the most advantageous
values of the mit (i= 1, 2, * * *, p; t= 1, 2, * , N). It can be demonstrated that under the given conditions this leads to a sum of squares
in the form:
R
9= E
(12)
t=l
P
(
j=l
v=l
Xtx)2.
kvj
This expression is very similar to the one appearing in the earlier analysis with just one relation.
The complete solution in mathematical form is given elsewhere.70 It
can be shown that the minimization of the expression (12) under conditions (10) and (11) leads again to the determinantal equation (6).
The system of linear homogeneous equations that yields the solutions is as follows:
(all
+ aipkvp = 0,
+ a2,kvp = 0,
XvV,)kv,+ al2kv2+
*
al2kv1+ (a22 XvV2)kv2+
(13)
.
aJpkvc+ a2pkv2+
* + (app - XvVp)kvp= 0,
v l= 21,
2,
R.
This system of equations can evidently only have a nontrivial solution if its determinant is zero. [A trivial solution is excluded by condition (10).] This is achieved by inserting for Xvone of the roots of the
determinantal equations (6). Then the computation of the k,j is possible, if one additional condition is imposed, e.g., condition (10) for v =w,
69T. Koopmans, Linear Regression Analysis. . . , cited in note 56.
70 G. Tintner, "A Note on Rank, Multicollinearity and Multiple Regression."

MULTIPLE
REGRESSION
FOR SYSTEMS
OF EQUATIONS
19
which normalizes the coefficients k,j by making their weighted sum of

squares equal to one.
, R we get a complete
By carrying out this process for v= 1, 2,
set of estimates for the coefficients k,i in equations (5). The minimized
sum of squares in (8) and (12) becomes AR(N- 1).
We can now interpret the number of degrees of freedom for the distribution of the sum of squares AR. For each v we have to minimize N
which appear in formula (8). They
sums of squaresDf= 1(xit-mit)2/Vi,
correspond to the deviations of the "dependent" variables from the
fitted regression equation in ordinary regression theory. The total number of sums is RN since v= 1, 2, * * *, R. Each sum corresponds to one
indeof the roots of equation (6), X1,X2, * * *, XR. There are p-R+1
pendent constants k,j (j=0, 1, 2, * * *, p) to be determined for each v.
The difference between
Their total number for all v is R(p-R)+R.
the number of sums of squares and the number of constants is
as given above, the number of degrees of freedom
(N-1-p+R)R
for AR. The procedure is analogous to the one ordinarily given in multiple regression. In fact, for R = 1 the expression becomes N - p, the
correct number of degrees of freedom in ordinary regression analysis
with p variables, i.e., one dependent and p -1 independent variables.
The difference between our new approach and the classical method of
fitting weighted regression equations given by Koopmans is the fact
that we determine here all the R smallest roots of the determinantal
equation (6) instead of only the smallest. This enables us to estimate R
sets of coefficients of the type (5) instead of just one.
B. Identification
We have now estimated the coefficients kq in (5) for v = 1, 2, * * *, R;
j=0, 1, 2, . . . , p on the basis of our estimate of R. This is equivalent
to establishing R weighted regression equations whose coefficients are
orthogonalized and normalized by the conditions (10) and (11). These
results represent the system (1), i.e., the Walrasian system of general
equilibrium with the modifications mentioned above.
But these equations are not yet economically meaningful, if considered each in isolation. We are for instance not able to say which ones
are demand equations, which one is the investment function, supply
functions, etc.7"In order to achieve a meaningful system of equations
we have to make additional assumptions.
Following a suggestion of Klein72 we put these assumptions into the
71 T. Haavelmo, "The Probability Approach in Econometrics," pp. 91 ff.,
pp. 99 ff.
72 L. R. Klein, "Pitfalls in the Statistical Determination of the Investment
Schedule."

20
GERHARD
TlNTNER
following form: Certain of the coefficients kvj (v =l, 2,

R;
*, p) will be assumed a priori to be equal to zero and hence
missing from some of tlhe equations (5). A perfect estimation of economically meaningful relationships will be possible if there is in each
equation of the system (5) at least one variable Mit that enters into
this equation alone. Hence all the coefficients k,j belonging to this
variable in all other equations of the system (5) are equal to zero. We
could say that the individual economically meaningful equations (e.g.,
demand functions, supply functions, etc.) are "generated" by the variables MIit that enter into them alone and into none of the other equations.
To give an example: We will for instance assume that certain specific
demand factors like income appear in the demand functions alone and
that cost factors like the prices of factors of production appear solely
in the supply equations, etc. It is apparent that there is a certain
amount of liberty possible in the choice of the specific variables that
should enter into given economically meaningful equations, like for instance demand functions. Statistical criteria for this choice will be given
below, but they must not be taken as decisive. We may very well decide
in favor of a system that is economically meaningful and gives a
rather poor fit against one that gives a more perfect statistical fit
but is difficult to interpret economically.
A certain amount of arbitrariness enters also into the selection of the
specific variables that should be included in a given economically meaningful equation. If it is a demand function, we may for instance take
average income, the distribution of incomes, taste factors, advertising
cost, etc. as variables that will enter into this specific equation apart
from the quantities bought and prices paid for this good (and possibly
also prices of related goods). The demand functions will differ according
to which particular variables we include into our equation. This is a
consequence of the fact that we make a somewhat arbitrary selection
of variables and parameters out of the comprehensive Walrasian system (1). An error will be committed by neglecting certain variables. We
can perhaps say that we actually replace the general Walrasian system
by a more restricted system of a kind of partial equilibrium.
Statistical criteria will be given below that should enable us to appreciate the statistical goodness of fit resulting from the inclusion of
certain variables in a specific equation. A comparison between different
possible selections is also feasible. But, as indicated above, such purely
statistical considerations are by no means decisive. Some of the initial
advantages of our approach may be lost or partially lost in this fashion.
The problem of identification is important especially for economic
policy. Assume for instance a policy of government investments. Then
j =1, 2, .

MULTIPLE REGRESSION FOR SYSTEMS OF EQUATIONS
21
one of the equations in (5) which represents the investment function

will be replaced by.the new conditions of government investments,
while all the other equations remain the same. But without having
solved the problem of identification we cannot say which one of the R
normalized and orthogonalized equations (5) (or which of the infinitely
many combinations of them that are equivalent) is actually the investment function. The system of equations given under the previous
conditions is useless for purposes of economic policy.
Hence, in order to get meaningful equations that are useful for economic policy (and also more enlightening for theory) we have to impose
the conditions mentioned above and carry out our estimation under the
new conditions apart from the ones imposed by (10) and (11). We will
later give statistical methods to estimate the loss in accuracy suffered
in the process of obtaining meaningful equations.
The estimation of the new coefficients kv/ determined under the new
conditions that make the equations meaningful is actually simpler than
the estimation of the system given before. A number of new conditions
is added to the orthogonalizing and normalizing conditions (10) and
(11). They express which of the coefficients kji are assumed to be zero
in any specific equation in (5).
Assume that s, conditions are imposed for equation v. Then
p/= p--sv is the number of coefficients kv,/ (j=1, 2, * * *, pv') to be
determined.
The method of estimation is essentially the same as before. We put
equal to zero in (13) the sv coefficients ckvthat are assumed to be equal
to zero for the purpose of identification and get the new system (14).
Here the numbering of the variables has been changed and does not
necessarily correspond to the one previously used, e.g., in (13).
(an - Xv'Vi)kvl' + al2kv2' +
(14)
(14)
al2kv' + (a22 - Xv'V2)kv2' +
alpv'kul' + a2pv,k2 + +'.
+- aklpvkp,v = 0,
+.
- a2p',kvpv,' =
0,
+ (apvpv - Xv')kvpv,' = 0,
v-1,
2,
, R.
This is again a system of linear homogeneous equations in the variables kv'. A nontrivial solution is possible only if the determinant is
equal to zero. In order to accomplish this we have to modify the determinantal equation (6) in such a fashion, that the rows and columns
corresponding to the sv variables that do not now appear in the system
(14) are left out. Denote the smallest latent root of the modified equation (6) by Xv'. Then we insert this solution Xv'into (14) and assume

22
GERHARD TINTNER
again a rule of normalization (for instance making the sum of the

squares of the k,,' equal to one). We get estimates for the k,,' which
are valid under our new conditions. We repeat this process for
v = 1, 2, * - *, R with the appropriate conditions satisfied in each case.
Then we achieve now the solution of the problem of estimation in such
a fashion that each individual equation is identified, i.e., has a specific
economic meaning. Our complete system contains now all the original
variables and all the "identifying" variables. This economic advantage
may stand against a statistical loss because the sum of squares is now
in general larger than before.
The test indicated above under A, a should be used for each set of
variables utilized for a given identified equation in order to make sure
that there is exactly one relationship between these variables.
C. Tests of Significance
We will now give tests of significance that should enable us to get
an idea about the goodness of the fit achieved and to estimate the loss
of statistical accuracy suffered by imposing new conditions for the purpose of identification.
- * - +SR=
Let 81+82+
S' be the total number of conditions imposed
in the process of identification. Define a quantity analogous to (7):
(15)
AR'
(N
1) (X1' + X2 + - - * + XR )
which is now the sum of the R smallest roots of the modified determinantal equations (6) multiplified by N-1. Each one of the roots Xv'
is computed by leaving out in (6) the appropriate s, rows and columns.
The quantity (15) is distributedlike x2with (N-1 -p+R)R+S'
de-
grees of freedom.
The following test of significance is analogous to a procedure given
This is apby Wilks.73 We form F = (N-1-P
+R)R (AR'-AR)/S'AR.
proximately distributed like Snedecor's F with (N-1 -p+R)R and S'
degrees of freedom. We fix a level of significance and test the following
hypothesis: That the difference between AR and AR' is zero, i.e., that
the introduction of the S' new conditions necessary for identification
has not materially deteriorated our fit.
There is no equivalent test for the individual equations. The reason
for this is that in the original system (5) the equations are not identified
and we hence do not know which one corresponds to a given meaningful
equation of our new set-up. Hence we must always determine a complete system before we can make a test of significance. There is, however,
a method by which we can compare identified systems that involve
different sets of conditions.
73S.
S. Wilks, MathematicalStatistics, Princeton, 1943, pp. 166 ff.

MULTIPLE
REGRESSION
FOR SYSTEMS
OF EQUATIONS
23
Assume the number of conditions again S' in the first system and S in
the second. Then we form a quantity ARcorresponding to (15). The quanis again
tity F=[(N-1-p+R)R+S]AR'/[(N-1-p+R)R+S']AR
like
distributed
F
Snedecor's with (N-1-p+R)IR+S'
approximately
and (N-1-p+R)R+S
degrees of freedom. The hypothesis to be
tested is again: That there is no essential difference in the sum of
squares of residuals divided by the appropriate number of degrees of
freedom resulting from the two sets of conditions (or in the two systems).
It is remarkable and entirely in the spirit of our approach to the
problem that it is not possible to test individually the difference between the k,j and ki'. It shows again that it is really not individual
equations that are determined in our case but that the entire system is
estimated as a whole.
Tests of significance for the individual kv' can be given that are
approximations and based upon an idea indicated by Koopmans.74 In
order to do this we have to assume a different normalization rule from
the one given above.
This new normalization rule is also more appropriate and useful in
economics. It consists in making one of the variables Mit, say Mlt,
the dependent variable. E.g., in the theory of demand we frequently
consider the quantity demanded as the dependent variable and the
price, income, etc. as independent variables.
It should be stressed, however, that now this distinction is made only
for the purpose of normalization and that it has definitely nothing to
do with the distinction between dependent and independent variables
made in classical regression analysis. There the assumption is that the
dependent variable alone is subject to disturbances while the fit is carred through for purposes of prediction assuming fixed values for the
so-called independent variables.75 Here our purpose is the estimation
of the structural coefficients themselves and not prediction. Disturbances enter into all our variables, not only into Xit which now assumes the role of "dependent" variable for purpose of normalization
only.
Let our new normalized solutions be denoted by kc,i"(v = 1, 2, * * , R;
j=2, 3, * , pv'). The system of equations becomes now:
(a22-Xv'V2)kv2"t+a23kv3"+
(16)
(16)
a23k,2"+- (a33-X'V3)kC3"-+
a2pvkv2/"
+a3pkv3+
74 T. Koopmans,
75
**
+a2pv
+a3pk ,p.'t
= a12,
=a13,
+(apvp'v -Xv'Fpv)kpv," =alpv.
Linear Regression Analysis in Economic Time Series, pp. 72 ff.
H. Hotelling, "The Selection of Variates for Use in Prediction with Some

24
GERHARD
TINTNER
This system of linear homogeneous equations will again have a nontrivial solution if we substitute for Xv'a solution for the modified determinantal equation (6). The modification consists in leaving out the
s, rows and columns corresponding to the variables that by assumption
do not enter into the specific vth equation.
Using an approximation given by Koopmans76 we can now compute
the variances and covariances of the kq"' under the assumption that
the variances of the systematic parts are much larger than the ones of
the disturbances.
The covariance of ku"i"and kj'" is then given by the formula:
(17)
Ekcvi"kvi"= Xv/Cij( E
kh"Vh
V1) (N
pv').
Here ci is the element corresponding to ai (i, j-2, 3,

, Pv') in the
matrix inverse to the one used in (16) to compute the k,j'. The method
of computation of this matrix is the same as the one given by Fisher77
in ordinary classical regression analysis; pv' is the number of variables
actually entering into the particular equation v.
We obtain the variance of ki'" by putting in formula (17) i=j and
the standard error by taking the square root. We can then use the
t-test78 to establish approximately the significance of the individual
kv, '. The quantity t' = kv' /VEk, il2 will follow the t-distribution with
N - Pv' degrees of freedom for large samples.
It should be mentioned that Anderson and Girshick established recently the distributions of the variances and covariances for some special cases.79
These tests of significance should help somewhat in choosing out of
the many possible ones a specific identifiable system that is economically sound and that also has statistical significance. It cannot be
denied, however, that the solutions reached are in some degree arbitrary and rest rather heavily upon economic assumptions, the validity
of which cannot be expressed in terms of probability. There does not
seem to be any way in which this fundamental difficulty can be overComments on the General Problem of Nuisance Parameters," Annals of Mathematical Statistics, Vol. 11, September, 1940, pp. 271-283.
7 T. Koopmans, Linear Regression Analysis in Economic Time Series, p. 80,
formula (47).
77 R. A. Fisher, Statistical Methods for Research Workers, 8th ed. New York,,
1941, pp. 150 ff.
78 T. Koopmans, Linear Regression Analysis in Economic Time Series, p. 95,
formula (4).
79 T. W. Anderson and M. A. Girshick, "Some Extensions of the Wishart Distribution," Annals of MathematicalStatistics, Vol. 15, December, 1944, pp. 345357.

MULTIPLE
REGRESSION
FOR SYSTEMS
25
OF EQUATIONS
come except by the accumulation of econometric studies which combine

sound economic theory with statistical verification and may eventually
give economics the same firm theoretical and empirically verified basis
that, in physics, is the envy of the social scientist. It is to be hoped
that the above methods may make a modest contribution towards the
achieving of this goal, or at least point the way to some more adequate approach.
4. AN APPLICATION
TO AGRICULTURAL
DATA
A. The Data
We will now apply our method to an endeavor to fit a demand and a
supply curve for agricultural products in the United States. Our data
cover the period 1920-1943 (N = 24). The data are annual figures.
They are the following:80 X1, Prices received by farmers, 1910-14 = 100;
X2, National income (billion $); X3, agricultural production, 1935-39
= 100; X4, time, origin between 1931 and 1932; X5, prices paid by
farmers, 1910-14=100. The means of the variables are presented in
Table 1.
TABLE 1
ARITHMETIC MEANS (X,)
Mean
Variable
Symbol
127.417
72.3975
100.625
0.000
136.460
Prices received by farmers

National income
Production
Time
Prices paid by farmers
Xi
X2
X3
X4
X5
The variance-covariance matrix of the data is given in Table 2. Since

all matrices are symmetrical, only the elements above the diagonal will
be presented.
TABLE 2
VARIANCE-COVARIANCE
Xi
X1
X2
X3
X4
X2
1212.593
536.182
557.636
MATRIX (aii)
X3
87.594
207.147
106.418
X4
-72.696
75.022
54.543
50.000
X5
X5
532.000
220.043
30.261
-38.543
240.652
B. Estimation of the Variances of the Disturbances

We use the variate difference method in order to get estimates of
80 The author is greatly obliged to Dr. James Cavin (Bureau of Agricultural
Economics, Washington, D. C.) for supplying the data and suggesting the problem.

26
GERHARD
TINTNER
the error variances. We present in Table 3 the appropriately computed

variances of several difference series for our data:
TABLE 3
VARIANCES OF DIFFERENCE SERIES
Difference
Xi
X2
X3
X5
1
2
3
4
5
337.885
130.649
47.901
28.580
24.349
72.346
19.068
9.319
7.349
7.056
J4.156
10.698
7.961
7.160
6.827
62.863
25.221
12.472
9.812
8.987
Tests indicate that the variances probably become stable for the fifth
difference series. Hence we will take the items in the last line of Table 3
as the estimates of the error variances Vi of our variables.
The variable time (X4) is evidently not subject to error and hence we
have V4 =0.
C. Estimation of the Number of Independent Linear Relationships
In order to estimate the number of independent relationships among
our variables we form the determinantal equation corresponding to
formula (6):
1212.593-24.349X
-72.696
532.000
536.182
87.594
557.636 -7.056X
207.147
75.022
220.043
106.418 -6.827X
54.543
30.261
(18)
50.000
=0.
-38.543
240.652 -8.987X
Since the variable X4 (time) is not subject to error, we have V4 =0 and

the term with X is missing from the fourth line.
The following table summarizes the latent roots (Xr) and the corresponding sums of squares (Ar) resulting from the determinantal equation (18):
TABLE 4
ROOTS OF EQUATION (18)
(Variables
Number
X1,
X2,
Roots
XI.
1
2
3
0.420
1.258
6.373
** Significant
X3,
X4,
X5)
Sum of Squares
at the 1-per-cent level.

9.660
38.594
185.173**
MULTIPLE
REGRESSION
FOR SYSTEMS
27
OF EQUATIONS
The sums of squares A, are computed according to formula (7). We

have for instance (N = 24): A1= 23 (0.420); A2= 23 (0.420+ 1.258), etc.
The test of significance assumes, as shown above, that A, is distributed like x2 with (N-i-p+r) r degrees of freedom. So we have for
instance for r=1(p=5):
(24-1-5+1)1=
19 degrees of freedom. For
a level of significance of 5 per cent we have x2=30.144 and for 1
per cent: 36.191. Our A1is only 9.660 and hence not significant at either
level. For r=2 we have: (24-1-5+2)2=40
degrees of freedom. We
have x2 for the 5-per-cent level: 58.840 and for the 1-per-cent level:
65.746. Our A2 is 38.594 and not significant at either level. For r=3
we have 63 degrees of freedom and the values of x2 are 86.330 and
94.655 at the 5-per-cent and 1-per-cent levels. The value of A3= 185.173
is larger than either and significantly different from zero. Hence we
should assume R =2. There are probably two independent linear relations between our variables, the demand and the supply curve which
we want to determine.
D. Weighted Regression Equations
We have concluded that there are probably two linear relationships
between our data in the population. We want to estimate them. That
is to say, we want to find estimates for the coefficients k,1 in the equations:
kilmit +
(19)
k12m2 t+
k13m3 t+
kl4M4t +
kl5m5t = 0,
0,k21Mt+k22M2t+k23M3t+k24M4t+k25M5t
O,
t
1, 2,
* , 24,
where the mit are the deviations of the mathematical expectations Mit
of the empirical variables Xit from their respective means. Formula (19)
corresponds to (5), if we take deviations from the means. The kXsare
restricted by the normalizing and orthogonalizing conditions (10) and
(11).
To compute first k1i we use the smallest latent root Xi =0.420 from
Table 4. Inserting this in formula (13) we get the following system of
homogeneous linear equations :81
1202.366k11+536.182kl2+ 87.594kl3- 72.696k14+ 532.000k16= 0,
536.182k11+ 554.672k12+ 207.147k13+ 75.022k14+ 220.043 k15= 0,
(20)
-
87.594k11+207.147kl2+103.551kl3+54.543kl4+
30.261k15=0,
72.696k11 +
38.543k15 = 0,
75.022k12+
54.543k13+50.000k14-
532.000k1l+220.043k12+ 30.261k13-38.543kl4+236.877k15
0.
81 For computational detail, see the author's earlier paper: "An Application of
the Variate Difference Method to Multiple Regression."

28
GERHARD
TINTNER
The determinant of the system of equations (20) is zero, because

Xi= 0.420 is a root of equation (18). The solutions of (20) appear in the
following equation:
(21) - 0.384m1 + 0.230m2 - 0.471m3 + 0.179m4 - 0.738m5 = 0.
[The subscript t has been omitted in (21) in order to simplify the notation. ]
Next we insert X2=1.258 into (13) and get the following solutions
for the k2i:
(22)
- 0.042ml + 0.424m2 - 0.879m3 + 0.129m4 - 0.171m5 = 0.
The two equations (21) and (22) solve our problem of estimation: They
are our estimates of the two relationships existing among our 5 variables.
E. Identification
The two equations (21) and (22) represent in an orthogonalized and
normalized form the two linear relations existing among our variables.
But evidently they cannot be interpreted in an economically meaningful way. We do not know which one of the two equations is the demand
curve, which one the supply curve. Also we can construct an infinite
number of equivalent relationships by multiplying each by an arbitrary
constant and combining them.
In order to solve the problem of identification we will proceed as
follows: To get the demand curve (v=1) we will assume that kC5=0
and in order to find the supply curve (v = 2) we will assume that k22= 0.
Then the two relationships to be fitted are:
k131m3t + kl4'm4t = 0,
(23)
kul'mlt + kl2'n2t +-
(24)
k21'mlt + k23'm3t + k24'm4t+ k251'm = 0.
In order to avoid the difficulties of collinearity we will first make

sure that there is exactly one relationship among the variables entering
into each equation. This can be done by modifying the determinantal
equation (18).
To investigate if there is more than one linear relationship among the
variables entering into (23), i.e., among M1, M2, M3, and M4, we delete
column 5 and line 5 in the equation (18). This gives the new determinantal equation:
1212.593 -24.349X'
536.812
557.636 -7.056X'
(25)
v~~~~~~~(25)
/106.418-6.827X'
87.594
207.147
-72.696
75.022
54.543
50.000

=0.
29
MULTIPLE REGRESSION FOR SYSTEMS OF EQUATIONS
The resulting roots of (25), NX,',and the sums of squares

sented in the following. table:
Ar'
are pre-
TABLE 5
ROOTS OF EQUATION(25)
(Variables X1, X2, X3, X4)
Number
Root
Sum of Squares
Xr
Ar
r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
1
2
** Significant
0.278
5.121
6.394
124.177**
at the 1-per-cent level of significance.
We conclude that there is probably only one relationship among the

variables M1, M2, M3, M4 in the population.
Now we consider the variables entering into (24). How many linear
relationships exist in the population among M1, M3, M4, and M5? We
construct a new determinantal equation from (18) by deleting the second line and column. The resulting roots of the determinantal equation
are presented in Table 6.
TABLE 6
Number
Root
Sum of Squares
1
2
** Significant
10.695
79.971**
0.465
3.012
at the 1-per-cent level of significance.
It appears again that there is exactly one relationship among the

variables in equation (29).
We present for future reference a summary of the results which we
obtain if we do not include time (X4) in our equations.
TABLE 7
Number
Root
Sum of Squares
1
2
3
**
Ar
0.799
1.115
49.001
18.377
44.022
1071.045**
Significant at the 1-per-cent level of significance.

30
GERHARD
TINTNER
TABLE
(Variables X1,
Number
X2,
X3)
Root
Sum of Squares
Ar
Nr
1.218
27.244
2
**
28.014
654.626**

TABLE 9
(Variables X1, X3, X5)
Number
Root
Ar
XI
1
2
**
Sum of Squares
0.473
14.302
10.879
339.756**
We replace now the two equations (23) and (24) by the following two
which are more convenient for economic purposes:
(26)
M3 = kii11m1+ k1211m2+ k1411m4,
(27)
M3 = k2l''ml + k2411m4
+ k2511m5
[we have suppressed the subscript t in (26) and (27) for the sake of
convenience]. Inserting the smallest root of (25) from Table 5
(X"'=0.278) in (16) we have to solve the system of equations:
1205.824k1l'" + 536.182kl21' - 72.696kl41' =
(28)
87.594,
536.182k11'' + 555.674kl21' + 75.022kl41' = 207.147,

- 72.696k11'"+
75.022kl21' + 50.000k141'=
54.543.
The solutions k,i" appear in the following equation (demand fun ction):
(29)
M3 = - 0.097m, + 0.424m2 + 0.313m4.
This result of the weighted-regression analysis should be compared with

the ordinary regression equation:
(30)
X3=
0.086x, + 0.407x2 + 0.356x4.
This ordinary multiple regression was derived in order to give esti-
mates of X3 for fixed x1, X2, x4. It is valid for prediction,but we believe

MULTIPLE
REGRESSION
FOR SYSTEMS
OF EQUATIONS
31
that our equation (29) is preferable as an estimate of the demand curve

itself.
In an analogous fashion we set up a system of equations for the k2,".
We insert the smallest root from Table 6 (X1=0.465) into the system
(16) and the results appear in the following equation (supply function):
(31)
M3
1.721m, + 0.809m4
3.611m5.
This should be compared with the results of the ordinary regression

method:
(32)
X3=
0.112x, + 1.323x4 + 0.089x5.
That is an equation set up for the prediction of X3 on the assumption

that fixed values of xi, X4, and X5are given. Note that in (32) the sign
of the coefficient of x6 is positive instead of negative as it should be for
the economic reasons: Increased prices paid by farmers make for lower
production. The sign is correct in the weighted regression equation (31).
We present also the result of our analysis for the case in which time
(X4) is not included. The weighted-regression equation corresponding to
the demand curve is then without the time trend:
(33)
M3 =
0.174m, + 0.547m2.
The corresponding ordinary regression equation is:

(34)
X3 =
- 0.141xi + 0.525x2.
The weighted-regression equation corresponding to the supply curve is:

(35)
M3=
5.055m,
11.248m5.
The corresponding ordinary regression equation is:

(36)
X3
= 0.561xl
1.115x5.
The coefficient of X5has now the right (negative) sign.

The two equations (29) and (31) or (33) and (35) are our estimates
for the demand function and the supply function of agricultural products. They are somewhat arbitrary, since the demand function has been
"generated" by income, the supply function by the prices paid by
farmers.
The arbitrariness comes from the particular choice of the identifying
variables which enter into (29) and (30), or (33) and (35). We could
have used, for instance, instead of national income the following variables or any combination of them: consumption, personal-income distribution, state of business, cost-of-living index, etc. In the same fashion
the choice of prices paid by farmers as identifying variable in equation
(31) or (35) (supply function) is arbitrary. The following variables (or

32
GERHARD
TINTNER
any combination of them) would have served just as well: Cost of agricultural production, agricultural wage rates, rents, technological coefficients, etc.
Hence we have to be very careful in using the equations (29) and
(31) or (33) and (35) in economic policy. Apart from statistical shortcomings which will be discussed in the following section we must bear
in mind that they are not unique. A different choice of the identifying
variables would possibly have given entirely different results. This is a
consequence of the fact that we have replaced the complete Walrasian
system by a much more restricted model of general equilibrium.
F. Tests of Significance
We want now to show some tests of significance. Let us first investigate whether we have lost anything in the process of identification.
That is to say, we want to inquire whether t e substitution of the economically meaningful relationships (29) and (31) has been accompanied
by some statistical disadvantages as compared to the orthogonalized
and normalized, but economically meaningless, relationships (21) and
(22).
In order to make the comparison we observe that from Table 4 it
appears that the sum of squares A2=38.594. This represents 40 degrees
of freedom. On the other hand we have from Tables 5 and 6: A1= 6.394
and A1= 10.695 respectively. Each has 20 degrees of freedom. Their sum
is 17.089 and this represents 40 degrees of freedom. So we see that the
introduction of identification has actually improved our fit. We get for
a test of significance: F = 2.258 and this is significant since at the 5-percent level F= 1.74, at the 1-per-cent level F= 2.20. These tests are of
course only approximations.
Another question we can now answer is for instance the following:
Was it necessary to include the variable X4 (time) in our analysis? If
we modify the determinantal equation (18) by leaving out column 4
and row 4 we have: X1=0.799 and X2=1.115 (Table 7). The sum of
squares A2=44.022 and this is based upon 20 degrees of freedom.
Compare this with A2 from Table 4 which is 38.594 with 19 degrees of freedom. We have the test function: F = (44.022 -38.594) X
(19)/(39.594) (1) = 2.605. But we have F=4.38 at the 5-per-cent level
for 1 and 19 degrees of freedom. Hence the difference is not significant
and the inclusion of X4 has not significantly improved our fit. It should
be remembered that this test is also only an approximation.
Finally we will indicate an approximate test of significance for the
individual regression coefficients in the weighted-regression equations.
Let us first consider (29). The inverse matrix to the matrix of the
coefficients on the left-hand side of equations (28) is:

MULTIPLE
REGRESSION
FOR SYSTEMS
OF EQUATIONS
33
TABLE 10
MATRIX
INVERSE
(cii)
XI
XI
X2
00.006228
X2
-0.009069
0.015469
X4
0.022663
-0.036401
0.107582
X,3
From our data we compute the standard error of the weighted-regression coefficients in (29). We have for instance for the coefficient of
mln:V/ [0.0972(24.349) +0.4242(7.056) +6.82730.006228 [0.278/(24 - 4)1)
=0.027. The corresponding t' is -0.097/0.027=
-3.592. It is significant for the level of significance of 1 per cent and 20 degrees of freedom. The required t is 2.845. In a similar fashion we get t' = 10.095 for
the coefficient of M2 in (29) and t'=2.820 for the coefficient of m4. The
first is significant at the 1-per-cent level, the second only at the 5-percent level of significance. The tentative nature of these results has been
indicated above.
We can also determine fiducial limits (or confidence limits) for the
regression coefficients in (29). The coefficient of ml can fall into the
interval -0.153 and -0.041 if the fiducial coefficient is 95 per cent
(t=2.086 for 20 degrees of freedom). The coefficient for m2 can vary
under the same conditions between 0.336 and 0.512. The coefficient
of M4, finally, may fall between 0.081 and 0.545. All these results have
to be considered as only approximately true.
We note the rather large intervals that are permitted for the variation of the regression coefficients representing our demand curve. This
emphasizes the very tentative nature of our conclusions.
All the regression coefficients in the weighted regression equation (31)
turn out to be not significant at the 5-per-cent level of significance.
Hence it appears that we are not able to determine to any reliable degree the conditions of agricultural supply from our data. The reason
for this is probably that some factors that are most important for the
supply of agricultural commodities, like for instance the weather, have
not been included in our analysis. This emphasizes the observations of
Henry Schultz82 and E. J. Working83that in agricultural data there is
probably a stable demand curve and a shifting supply curve. We can
determine the first, but not the second.
All regression coefficients in (33) are significant at the 1-per-cent level
of significance (demand curve without time trend). The coefficients in
(35) are significant at the 5-per-cent level, but not at the 1-per-cent
82
83
H. Schultz, The Theoryand Measurementof Demand, Chicago, 1938, pp. 72 ff.

E. J. Working, "What do Statistical Demand Curves Show?"

34
GERHARD
TINTNER
level. We are not able to say very much about the supply curve with
any degree of accuracy.
G. Tentative Applications to Policy
We have emphasized before that the main reason why we have to
deal with problems of identification is that we need economically meaningful relationships for purposes of economic policy. We will tentatively
utilize some of our results in this fashion. It should be emphasized,
however, that these applications are only in the nature of illustrations
and should not be taken too seriously.
Let us consider our demand curve, which can be established with
some accuracy. We utilize first equation (29) (weighted regression with
time trend) to estimate the elasticity of demand (M3) with respect to
price (ml). This elasticity is evaluated at the means given in Table 1.
Hence it is only valid for conditions that are the same as the average ones in the period covered by our data (1920-43). The elasticity
with respect to price is: -0.097(127.417/100.625) = -0.123. That is to
say: Other things being equal, if the price increases by 1 per cent the
demand for agricultural commodities as a whole will decrease by approximately 0.123 per cent or about i of one per cent. This figure
should be compared with the elasticity derived under similar assumptions from the ordinary regression equation (30). This elasticity is
- 0.109. We believe for reasons indicated above that our estimate is
preferable.
We can also estimate the elasticity of demand with respect to price
from the weighted-regression equation (33) which does not include a
time trend. We get then for the price elasticity of demand: -0.222.
This should be compared to the elasticity of demand derived from the
ordinary regression equation (34), which is -0.179.
Further we can derive the income elasticities of demand. From equation (29), the income elasticity computed at the means in Table 1 is
0.307. That is to say: Other things equal and conditions approximately
the same as in the period 1920-43, an increase in national incomneby
1 per cent will make for an increase in demand for agricultural products
by about 0.307 per cent or not quite 3 of one per cent.
This income elasticity should be compared to the one derived from
the ordinary regression equation (30) which is 0.293.
Income elasticity can also be derived from the weighted-regression
equation without time trend (33). There it appears as 0.396. This
should be compared to the corresponding ordinary regression equation
(34). The income elasticity is there 0.378.
We can derive tentatively fiducial limits for the price elasticities
from our weighted-regression equations. They appear for equation (29)

MULTIPLE
REGRESSION
FOR SYSTEMS
OF EQUATIONS
35
which includes a time trend: -0.052 and -0.195 (5-per-cent level of

significance.) That is to say: If conditions are on the whole the same as
in the period 1920-1943 and if other things are equal we can anticipate
with a probability of about 95/100 that the elasticity will fall into the
interval indicated. It is apparent that probably the price elasticity is
smaller than one.
This last result is of some importance for economic policy. If the
price elasticity is smaller than one and if we have constant marginal
and average cost (as indicated in previous studies)84 then a larger output of agricultural commodities (brought about, for instance, by a government subsidy) will mean a smaller net income of the farmers.85
The fiducial limits for the price elasticity derived from equation (33),
which has no time trend, are: -0.145 and -0.298.
In a similar fashion we get fiducial limits for the elasticity of demand
with respect to income. The limits are from the equation (29) which
includes a time trend: 0.243 and 0.371. From equation (33) which has
no time trend we have the limits: 0.331 and 0.460.
An important question for economic policy is the following: Is the
price elasticity larger than the income elasticity? Our results permit us
to give an answer within the limitations of our particular approach.
Let us take first the demand function which includes time (29). The
price elasticity is -0.123 and the income elasticity 0.307. Their difference is 0.430. Is this difference significant?
In order to investigate this question we note that the variance of
akll"'-bk12" is a2EkI1"2-2abEkll"k12"+b2Ek2/'2. We have for the elasticities: a=127.417/100.625 and b=72.375/100.625. The means are
taken from Table 1. Using our results and especially Table 10 we have
for the corresponding standard error: 0.060. Then t=0.430/0.060
=7.666. This is significant at the 1-per-cent level of significance for
20 degrees of freedom. The t required is only 2.845.
A similar result appears if the test is applied for the elasticities derived from (33), i.e., from the weighted-regression equation which does
not include a time trend. There we have the price elasticity of demand
-0.222 and the income elasticity of demand: 0.396. The difference is
0.618. The standard error, computed in the same fashion as before is
0.066. Here t=9.364. This is clearly significant for 21 degrees of freedom, since at the 1-per-cent level of significance a t of only 2.821 is
required.
84
G. Tintner, "A Note on the Derivation of Production Functions from Farm
Records,"
Vol. 12, January,

ECONOMETRICA,
1944, pp. 26-34;
G. Tintner and
0. H. Brownlee, "Production Functions Derived from Farm Records," Journal of

Farm Economics, Vol. 26, August, 1944, pp. 566-571.
80See, e.g., K. E. Boulding, Economic Analysis, New York, 1941, pp. 169 ff.

36
GERHARD
TINTNER
Hence we would conclude that it is likely that the income elasticity

is definitely larger than the price elasticity of demand. That is to say a
given percentage increase in national income will in all probability increase farm incomes more than the same percentage increase in agricultural prices. This conclusion is true if we have constant marginal
(and average) cost, as some previous studies seem to indicate.
We may finally use equation (35), the supply curve of agricultural
commodities without time trend. The results are here quite uncertain
since the regression coefficients are significant only at the 5-per-cent
level and not at the 1-per-cent level.
The estimated elasticity of supply with respect to price is 6.401. That
is to say, an increase of prices by 1 per cent will bring forth an increase
in agricultural production by more than 6 per cent, if conditions are
on the whole the same as over the period considered. This estimate
seems much too high. The 5-per-cent fiducial or confidence limits for this
elasticity are: 1.350 and 11.452. The lower limit seems to be much
nearer to the true elasticity of supply. In any case, price elasticity appears to be larger than one, so that the increase of agricultural supply
will be at least proportional but probably more than proportional to
the increase in agricultural prices. These results should be interpreted in
the light of the low statistical reliability of our equation.
The elasticity of supply with respect to prices paid by farmers is
estimated as - 15.254. This again seems to be much too large. The
5-per-cent fiducial limits of this elasticity are: - 3.070 and - 27.463.
Even the lower limit seems still too high.
Iowa State College


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Multiple Regression for Systems of Equations

Author(s): Gerhard Tintner

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MULTIPLE REGRESSION FOR SYSTEMS OF EQUATIONS*t

It has been apparent that the classical method of least-squares

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Many of the authors following Haavelmo suggested the introduction

In order to clarify our ideas we will first assume the existence of a

We have here q equations in Q> q variables zj. We can imagine that

This content downloaded from 132.248.147.90 on Mon, 3 Nov 2014 12:53:35 PM

This content downloaded from 132.248.147.90 on Mon, 3 Nov 2014 12:53:35 PM

I. Fisher, The Purchasing Power of Money, New York, 1911.

M. Keynes, A Treatise on Money, New York, 1930.

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Assume that we have now R equations in our simplified system

Systems, Oslo, 1934, pp. 47 fif.

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We would like to mention here that our purpose is not prediction

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This problem, the so-called question of "identification," will be taken

v = 1,2, .. * ,R; t = ly,2,

This assumption is permissible only if we feel reasonably certain that

This content downloaded from 132.248.147.90 on Mon, 3 Nov 2014 12:53:35 PM

below would have to be slightly modified in consequence, especially the

This content downloaded from 132.248.147.90 on Mon, 3 Nov 2014 12:53:35 PM

This content downloaded from 132.248.147.90 on Mon, 3 Nov 2014 12:53:35 PM

This content downloaded from 132.248.147.90 on Mon, 3 Nov 2014 12:53:35 PM

nomials. It will be shown below that our procedures do not necessarily

The Variate Difference Method.

Ibid., pp. 67 ff., 73 ff.

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P. L. Hsu64in order to estimate R. This is equivalent to forming an idea

where ai is the sample covariance of Xit and Xit. That is to say,

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The number of degrees of freedom in the distribution of A,.will be interpreted later.

This still leaves Rp coefficients k,,1(v= 1, 2, * * * , R; j= 1, 2, * * * , p).

stance, express the first p-R variablesmit,

mpt. Hence we need

67 F. N. David and J. Neyman, "Extension of the Markoff Theorem on Least

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The f2 conditions imposed on the pR coefficients kq1(v= 1, 2, *.**, R;

is the Kronecker delta. It is one for v = w and zero for v w.

This content downloaded from 132.248.147.90 on Mon, 3 Nov 2014 12:53:35 PM

which normalizes the coefficients k,j by making their weighted sum of

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following form: Certain of the coefficients kvj (v =l, 2,

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MULTIPLE REGRESSION FOR SYSTEMS OF EQUATIONS

one of the equations in (5) which represents the investment function

al2kv' + (a22 - Xv'V2)kv2' +

alpv'kul' + a2pv,k2 + +'.

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again a rule of normalization (for instance making the sum of the

The quantity (15) is distributedlike x2with (N-1 -p+R)R+S'

S. Wilks, MathematicalStatistics, Princeton, 1943, pp. 166 ff.

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+(apvp'v -Xv'Fpv)kpv," =alpv.

Linear Regression Analysis in Economic Time Series, pp. 72 ff.

H. Hotelling, "The Selection of Variates for Use in Prediction with Some

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Here ci is the element corresponding to ai (i, j-2, 3,

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come except by the accumulation of econometric studies which combine

Prices received by farmers