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Estimating a Falsified Model

Author

Listed:
  • Andrew J. Buck

    (Department of Economics, Temple University)

  • George M. Lady

    (Department of Economics, Temple University)

Abstract

It is common econometric practice to propose a system of equations, termed the "structure," estimate each endogenous variable in the structure via a linear regression with all of the exogenous variables as arguments, and then employ one of variety of regression techniques to recapture the coefficients in the (Jacobian) arrays of the structure. A recent literature, e.g., Lady and Buck (2015), has shown that a qualitative analysis of a model's structural and estimated reduced form arrays can provide a robust procedure for assessing if a model's hypothesized structure has been falsified. This paper shows that the even weaker statement of the model's structure provided by zero restrictions on the structural arrays can be falsified, independent of the proposed nonzero entries. When this takes place, multi-stage least squares, or any procedure for estimating the structural arrays with the zero restrictions imposed, will present estimates that could not possibly have generated the data upon which the estimated reduced form is based. The examples given in the paper are based upon a Monte Carlo sampling procedure.

Suggested Citation

  • Andrew J. Buck & George M. Lady, 2016. "Estimating a Falsified Model," DETU Working Papers 1601, Department of Economics, Temple University.
    • Handle: RePEc:tem:wpaper:1601
    as

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    File URL: http://www.cla.temple.edu/RePEc/documents/DETU_16_01.pdf
    File Function: First version, 2016
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    References listed on IDEAS

    as
    1. Lady, George M. & Buck, Andrew J., 2011. "Structural models, information and inherited restrictions," Economic Modelling, Elsevier, vol. 28(6), pages 2820-2831.
    2. Buck, Andrew J. & Lady, George M., 2012. "Structural sign patterns and reduced form restrictions," Economic Modelling, Elsevier, vol. 29(2), pages 462-470.
    3. Lady, George M., 1995. "Robust economic models," Journal of Economic Dynamics and Control, Elsevier, vol. 19(3), pages 481-501, April.
    4. 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.
    Full references (including those not matched with items on IDEAS)

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    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, 2015. "Estimating a Falsified Model: Some Impossibility Theorems," DETU Working Papers 1506, Department of Economics, Temple University.

    More about this item

    Keywords

    Estimation; Falsified Model; reduced form; qualitative analysis;
    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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