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Structural sign patterns and reduced form restrictions

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  • Buck, Andrew J.
  • Lady, George M.

Abstract

This paper reconsiders the degree to which the sign patterns of hypothesized structural arrays limit the possible outcomes for the sign pattern of the corresponding estimated reduced form. The conditions under which any structural restrictions would apply were believed to be very narrow, rarely found to apply, and virtually never investigated. As a result, current practice does not test the structural hypothesis in terms of the comparison of the estimated reduced form and the permissible reduced form sign patterns. This paper shows that such tests are always possible. Namely, that the sign patterns of the hypothesized structural arrays always limit the sign patterns that can be taken on by the estimated reduced form. Given this, it is always possible to falsify a structural hypothesis based only upon the sign pattern proposed. Necessary conditions, algorithmic principles, and examples are provided to illustrate the analytic principle and the means of its application.

Suggested Citation

  • Buck, Andrew J. & Lady, George M., 2012. "Structural sign patterns and reduced form restrictions," Economic Modelling, Elsevier, vol. 29(2), pages 462-470.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:462-470
    DOI: 10.1016/j.econmod.2011.12.003
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    References listed on IDEAS

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    1. Buck, Andrew J. & Lady, George M., 2005. "Falsifying economic models," Economic Modelling, Elsevier, vol. 22(5), pages 777-810, September.
    2. Kelvin Lancaster, 1962. "The Scope of Qualitative Economics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 29(2), pages 99-123.
    3. Andrew J. Buck & George M. Lady, 2010. "An Expanded Scope For Qualitative Economics," DETU Working Papers 1007, Department of Economics, Temple University.
    4. Lady, George M. & Quirk, James P., 2007. "The scope of the LeChatelier Principle," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 381(C), pages 351-365.
    5. George Lady, 2000. "Topics in nonparametric comparative statics and stability," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 6(1), pages 67-83, February.
    6. W. M. Gorman, 1964. "More Scope for Qualitative Economics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 31(1), pages 65-68.
    7. Titus O. Awokuse & David A. Bessler, 2003. "Vector Autoregressions, Policy Analysis, and Directed Acyclic Graphs: An Application to the U.S. Economy," Journal of Applied Economics, Universidad del CEMA, vol. 6, pages 1-24, May.
    8. George Lady & James Quirk, 2010. "The global LeChatelier Principle and multimarket equilibria," Review of Economic Design, Springer;Society for Economic Design, vol. 14(1), pages 193-201, March.
    9. Lady, George M, 1983. "The Structure of Qualitatively Determinate Relationships," Econometrica, Econometric Society, vol. 51(1), pages 197-218, January.
    10. Ritschard, Gilbert, 1983. "Computable Qualitative Comparative Static Techniques," Econometrica, Econometric Society, vol. 51(4), pages 1145-1168, July.
    11. William J. Gillen & Antonio Guccione, 1990. "The Introduction of Constraints in Lancaster's Qualitative Comparative Statics Algorithm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(4), pages 1053-1061.
    12. Lady, George M. & Maybee, John S., 1983. "Qualitatively invertible matrices," Mathematical Social Sciences, Elsevier, vol. 6(3), pages 397-407, December.
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    Cited by:

    1. Andrew J. Buck & George M. Lady, 2015. "A New Approach to Model Verification, Falsification and Selection," Econometrics, MDPI, vol. 3(3), pages 1-28, June.
    2. Andrew J. Buck & George M. Lady, 2016. "Estimating a Falsified Model," DETU Working Papers 1601, Department of Economics, Temple University.

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    More about this item

    Keywords

    Qualitative analysis; Structural form; Reduced form; Identification; Model falsification;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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