Structural estimation is a technique for estimating deep "structural"

parameter A parameter (), generally, is any characteristic that can help in defining or classifying a particular system (meaning an event, project, object, situation, etc.). That is, a parameter is an element of a system that is useful, or critical, when ...

s of theoretical

economic models In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework desig ...

. The term is inherited from the

simultaneous equations model Simultaneous equations models are a type of statistical model in which the dependent variables are functions of other dependent variables, rather than just independent variables. This means some of the explanatory variables are jointly determined ...

. Structural estimation is extensively using the equations from the economics theory, and in this sense is contrasted with "

reduced form In statistics, and particularly in econometrics, the reduced form of a system of equations is the result of solving the system for the endogenous variables. This gives the latter as functions of the exogenous variables, if any. In econometrics, t ...

estimation" and other nonstructural estimations that study the statistical relationships between the observed variables while utilizing the economics theory very lightly (mostly to distinguish between the

exogenous and endogenous variables In an economic model, an exogenous variable is one whose measure is determined outside the model and is imposed on the model, and an exogenous change is a change in an exogenous variable.Mankiw, N. Gregory. ''Macroeconomics'', third edition, 1997 ...

, so called "descriptive models"). The idea of combining statistical and economic models dates to mid-20th century and work of the

Cowles Commission The Cowles Foundation for Research in Economics is an economic research institute at Yale University. It was created as the Cowles Commission for Research in Economics at Colorado Springs in 1932 by businessman and economist Alfred Cowles. In 19 ...

. The difference between a structural parameter and a reduced-form parameter was formalized in the work of the

Cowles Foundation The Cowles Foundation for Research in Economics is an economic research institute at Yale University. It was created as the Cowles Commission for Research in Economics at Colorado Springs in 1932 by businessman and economist Alfred Cowles. In 19 ...

. A structural parameter is also said to be "policy invariant" whereas the value of reduced-form parameter can depend on exogenously determined parameters set by public policy makers. The distinction between structural and reduced-form estimation within "microeconometrics" is related to the

Lucas critique The Lucas critique, named for American economist Robert Lucas's work on macroeconomic policymaking, argues that it is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historica ...

of reduced-form macroeconomic policy predictions.

Structured and reduced form models

When the Cowles Commission introduced the term "reduced form" it was used to define a set of equations where the "left-hand"

dependent variables Dependent and independent variables are variables in mathematical modeling, statistical modeling and experimental sciences. Dependent variables receive this name because, in an experiment, their values are studied under the supposition or demand ...

never appeared on the right-hand of the equations, as opposed to the

simultaneous equations In mathematics, a set of simultaneous equations, also known as a system of equations or an equation system, is a finite set of equations for which common solutions are sought. An equation system is usually classified in the same manner as single ...

, where the dependent variable of an equation can appear as an input in other formulas. The original distinction between structure and reduced-form was between the underlying system and the direct relationship between observables implied by the system. Different combinations of structural parameters can imply the same reduced-form parameters, so structural estimation must go beyond the direct relationship between variables. Many economists now use the term "reduced form" to mean statistical estimation without reference to a specific economic model. For example, a regression is often called a reduced-form equation even when no standard economic model would generate it as the reduced form relationship between variables. These conflicting distinctions between structural and reduced form estimation arose from the increasing complexity of economic theory since the formalization of simultaneous equations estimation. A structural model often involves sequential decision-making under uncertainty or strategic environments where beliefs about other agents' actions matter. Parameters of such models are estimated not with regression analysis but non-linear techniques such as generalized method of moments,

maximum likelihood In statistics, maximum likelihood estimation (MLE) is a method of estimating the parameters of an assumed probability distribution, given some observed data. This is achieved by maximizing a likelihood function so that, under the assumed sta ...

, and indirect inference. The reduced-form of such models may result in a regression relationship but often only for special or trivial cases of the structural parameters.

Notes

References

* * * * {{Econometrics-stub Estimation methods Economic methodology Econometrics

Structured and reduced form models

See also

Notes

References