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Dynamic Econometrics$
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David F. Hendry

Print publication date: 1995

Print ISBN-13: 9780198283164

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198283164.001.0001

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The Theory of Reduction

The Theory of Reduction

(p.344) 9 The Theory of Reduction
Dynamic Econometrics

David F. Hendry (Contributor Webpage)

Oxford University Press

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

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