Background
In econometrics and statistical modeling, understanding how different models relate to one another is essential. Nested models are a concept used to compare models that have differing numbers of parameters and variables.
Historical Context
The terminology and conceptual framework of nested models have their roots in econometrics and statistics. As researchers developed more complex models, the need arose to formally understand how simpler models could be derived from more complex counterparts through parameter restrictions.
Definitions and Concepts
Nested models refer to the relationship between two econometric models where one model can be simplified to another by imposing a set of restrictions on the parameters. If model A can be transformed into model B by exact parameter constraints, model A is considered nested within model B.
Major Analytical Frameworks
Classical Economics
Classical economics, primarily concerned with macroeconomic aggregates and the long-run perspective, does not typically focus on intricate econometric modeling techniques such as nested models.
Neoclassical Economics
Neoclassical economics utilizes nested models primarily within microeconomic and some macroeconomic analysis, particularly when comparing simpler models to more complex specifications through restrictions.
Keynesian Economics
Keynesian econometric models often involve multiple equations and variables, making nested modeling a useful concept to determine the relevance of different economic factors.
Marxian Economics
Marxian economists may use nested models in empirical studies to compare complex models of capital and labor dynamics with simplified frameworks.
Institutional Economics
Within institutional economics, nested models can be used to assess how institutional changes impact economic outcomes by comparing broad models to those with focused institutional variables.
Behavioral Economics
In behavioral economics, nested models might be useful to compare traditional rational-agent models with those that incorporate psychological factors.
Post-Keynesian Economics
Post-Keynesian frameworks often necessitate nested models to assess the impacts of different macroeconomic assumptions, allowing for a transition from broader theories to specific empirical applications.
Austrian Economics
Austrian economists, while often skeptical of over-reliance on mathematical modeling, could potentially use nested models in empirical studies contrasting different economic theories.
Development Economics
Development economists frequently use nested models to compare the efficacy of different interventions by imposing restrictions on comprehensive development frameworks.
Monetarism
Monetarist approaches might use nested models to contrast basic monetarist principles with more detailed specifications involving additional macroeconomic variables.
Comparative Analysis
Comparative analysis using nested models ensures rigor in hypothesis testing by allowing researchers to see how well a restricted model (nested model) describes the data in comparison to a more complex one.
Case Studies
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An analysis of consumer choice might involve a model with multiple influencing factors (a general model), compared to a simpler one (the nested model) that may constrain some effects to zero.
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In macroeconomics, examining the effects of fiscal policies might involve nested models where a broader model includes all possible economic variables, but a nested model only includes the relevant ones.
Suggested Books for Further Studies
- “Econometric Analysis” by William H. Greene
- “Introduction to Econometrics” by G.S. Maddala
- “Econometrics” by Fumio Hayashi
Related Terms with Definitions
- Parameter Restrictions: Conditions placed on the coefficients of a model to test more specific hypotheses or to derive nested models.
- Hypothesis Testing: Statistical methods used to determine if the relationship between nested models holds true.
- Model Specification: The detailed form and variables included in an econometric model.
- Likelihood Ratio Test: A statistical test used to compare the goodness-of-fit between nested models.
- Alternative Hypothesis: In hypothesis testing, the assumption that a difference exists between models or treatments.
