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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.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 2 ()
Pages: 462-470

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:462-470

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Qualitative analysis; Structural form; Reduced form; Identification; Model falsification;

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  1. Ritschard, Gilbert, 1983. "Computable Qualitative Comparative Static Techniques," Econometrica, Econometric Society, vol. 51(4), pages 1145-68, July.
  2. Lady, George M, 1983. "The Structure of Qualitatively Determinate Relationships," Econometrica, Econometric Society, vol. 51(1), pages 197-218, January.
  3. 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.
  4. Lady, George M. & Maybee, John S., 1983. "Qualitatively invertible matrices," Mathematical Social Sciences, Elsevier, vol. 6(3), pages 397-407, December.
  5. Buck, Andrew J. & Lady, George M., 2005. "Falsifying economic models," Economic Modelling, Elsevier, vol. 22(5), pages 777-810, September.
  6. 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. 0, pages 1-24, May.
  7. George Lady & James Quirk, 2010. "The global LeChatelier Principle and multimarket equilibria," Review of Economic Design, Springer, vol. 14(1), pages 193-201, March.
  8. Gillen, William J & Guccione, Antonio, 1990. "The Introduction of Constraints in Lancaster's Qualitative Comparative Statics Algorithm," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1053-61, November.
  9. Andrew J. Buck & George M. Lady, 2010. "An Expanded Scope For Qualitative Economics," DETU Working Papers 1007, Department of Economics, Temple University.
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