KNOWLEDGE-BASED VARIABLE SELECTION FOR TWO STAGE LEAST SQUARES USING PRINCIPAL COMPONENTS

Both economic and econometric knowledge are needed to estimate and adopt an equation. Economic knowledge is represented by the meanings of possible explanatory variables for an explained variable, the magnitudes concerning their coefficients, the functional form of the equation, and the constraints and hypotheses concerning their coefficients. Econometric knowledge for 2SLS using principal components is the classifications of variables, t-test, Durbin-Watson test, Basmann test, standardized residual test, turning point test, and fitting test. It is important to make a computer process knowledge of applied econometricians. The Researcher System OEPP which can process them may reduce drastically research time and cost and improve applied econometrics.