The partial least squares-fix point method of estimating interdependent systems with latent variables

Abstract

This paper describes a method for estimating the unknown parameters of an interdependent simultaneous equations model with latent variables. For each latent variable there may be single or multiple indicators. Estimation proceeds in three stages: first, estimates of the latent variables are constructed from the associated manifest indicators; second, treating the estimates as directly observed, fix-point estimates of the structural form parameters are obtained; third, the location parameters are estimated. The method involves only repeated application of ordinary least squares and no distributional assumptions are needed. The paper concludes with an empirical application of the method.

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