Question: 2. Consider the two-equation model y = by + x + X + U y =bY + CX + U where x's are exogenous

$2. Consider the two-equation model [ begin{array}{c} y_{1}=b_{1} y_{2}+c_{1} x_{1}+c_{2} x_{2}+u_{1} y_{2}=b_{2} y_{1}+c$

2. Consider the two-equation model y = by + x + X + U y =bY + CX + U where x's are exogenous variables, and u's are error terms. (1) Discuss the identification of each of the equations of the model. (2) Now suppose you want to estimate the second equation by two-stage least squares. (a) Explain carefully, step by step, how you would estimate the coefficients. (b) How do you check whether the instruments are weak or not? (c) How do you check whether the instruments are exogenous or not?

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