LSE approach to econometrics

The LSE approach to econometrics involves viewing econometric models as reductions from some unknown data generation process (DGP). A complex DGP is typically modelled as the starting point and this complexity allows information in the data from the real world but absent in the theory to be drawn upon. The complexity is then reduced by the econometrician by a series of restrictions which are tested.

One particular functional form, the error-correction model, is often arrived at when modelling time series. Sargan and Hendry (with his general-to-specific modeling) were key figures in the development of the approach and the one way the approach has been extended is through the work on integrated and cointegrated systems by Engle and Granger and Søren Johansen and Katarina Juselius. Another commonly used functional form is distributed lag or autoregressive distributed lag.

Sir David F. Hendry is considered to be the principal architect of the LSE Approach. The methodology is often referred to as General-to-Specific Modelling, "Gets modeling" or David Hendry's method.

The software package OxMetrics implements this process via the PcGive module Autometrics

In the 1970s, when the LSE Approach was in its infancy, Berkeley Professor Edward E. Leamer was an early critic of model discovery methodologies.

In recent years the approach evolved to include: multiple reduction path searches, indicator saturation, COMFAC testing, and cointegrated vector autoregressive structures.

Economists often associated with the "Hendry Methodology" include: Clive Granger, Robert Engle, Søren Johansen, Graham Mizon, Jennifer Castle, Hans M. Krolzig, Neil Ericsson, Jurgen Doornik.

References

we use this technique to remove those variables which have less influence on the dependent variable