What is simply meant by reduced form?

In econometrics, what is meant by reduced form? Also, what are people looking for when they say “I would like to see the reduced form estimates.” This has been thrown around at work and individual explanations and Google searches are overly technical. Hoping someone where would be able to give a simple example.

Answer

Take a look at this simple example showing how the Keynesian consumption function and equilibrium condition can be re-written in a reduced form.

The reduced form of a model is the one in which the endogenous variables are expressed as functions of the exogenous variables (and perhaps lagged values of the endogenous variables). Very roughly, reduced form estimates do not give you the structural, primitive policy-invariant behavioral parameters that you (sometimes) care about, such as parameters of an agent’s utility function or the slopes of the demand and supply curves.

With RFEs, you only get functions of those parameters (and often not even that). For some purposes, that can be enough, which is why some people want to see them. For example, you can frequently get the sign of the relationship from RF estimates, but not the magnitude. Once is a blue moon, you can use algebra to solve for structural parameters from the RFEs.

Finally, it is also the case that some people will not believe the assumptions needed to estimate the structural parameters.

Attribution
Source : Link , Question Author : CJ12 , Answer Author : dimitriy

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