Chapter

The Theory of Reduction

David F. Hendry

in Dynamic Econometrics

Published in print February 1995 | ISBN: 9780198283164
Published online November 2003 | e-ISBN: 9780191596384 | DOI: http://dx.doi.org/10.1093/0198283164.003.0009

Series: Advanced Texts in Econometrics

 The Theory of Reduction

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Twelve stages of reduction are delineated from the actions of agents in an economy to an econometric model. The actual measurement process induces the DGP, followed by data transformations and aggregation; formulating parameters of interest; and partitioning the data. Marginalization, sequential factorization, the mapping to I(0), and conditional factorization can involve considerable loss of information if inappropriately implemented. Constancy, lag truncation, and functional form are discussed, leading to the derived model. The main concepts of econometrics arise as measures of ‘no loss of information’ about parameters of interest during a reduction. The reduction sequence also entails a taxonomy of information sets for model evaluation. These clarify the relation of model‐selection criteria to the null hypotheses of test statistics. Implicit model design is criticized in favour of an explicit approach.

Keywords: aggregation; conditioning; data transformations; implicit model design; marginalization; model‐selection criteria; reduction; sequential factorization; taxonomy of information

Chapter.  13263 words. 

Subjects: Econometrics and Mathematical Economics

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