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Definition of Order Condition

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Definition: Definition of Order Condition: In a econometric system of simultaneous equations, each equation may satisfy the order condition, or not do so. If it does not, its parameters are not all identified.

The order condition is often easy to verify. Often the econometrician verifies that the order condition is satisfied and assumes with this justification that the equation is identified, although formally a stronger requirement, the rank condition, must be satisfied. For each equation there must be enough instrumental variables available for the equation to have as many instruments as there are parameters.

The system can satisfy a form of the order condition: that there be as many exogenous variables in the reduced form of the system as there are parameters. (Econterms)

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