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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page General-to-Specific Procedures for Fitting a Data-Admissible, Theory-Inspired, Congruent, Parsimonious, Encompassing, Weakly Exogenous, Identified, Structural Model to the DGP: A Translation and Critique
Jon Faust and Charles H. Whiteman

Abstract:  We characterize the LSE approach by its implications for reduced-form modeling and structural interpretations. Much of what has come to be associated with the LSE methodology involves the approach to fitting reduced forms, and can be thought of as a pragmatic solution to problems created by short samples plagued by serial correlation. The policy analysis one might be able to do with an LSE model, on the other hand, hinges on structural identification arguments which do not meet the classic Cowles Commission standards, and is thus suspect.

Full paper (156 KB PDF) | Full paper (1641 KB Postscript)

Reduced form, identification, instruments

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