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Considers what was old about political economy and questions the new. The transition from old to new represents a move from economics to political economy, in which the latter includes the approach of public choice, a new interaction between economists and political scientists, and a rapid growth of interest in the political economy approach. Three areas of contribution in new political economy: the role of institutions, rational choice analysis, and the deployment of empirical evidence are questioned, respectively, for their exogeneity, application, and demonstrability.

Investigates the sources of party support in 2001. The analyses specify a series of multivariate models that capture the effects of the key variables from each of the sociological and individual rationality frameworks. Party identification, leader images, issue proximities, and party performance evaluations on the economy and other important policy areas combine to exercise sizeable effects on vote choice. Tactical voting is also evident, benefiting the Liberal Democrats at the expense of Labour and the Conservatives. In contrast to many earlier studies of British electoral politics, we make strong claims about the effects of evaluations of party leader images on electoral choice. Exogeneity tests buttress these claims.

Exogenous variables play a crucial role in econometrics, yet ‘exogeneity’ is often imprecise. Exogenous connotes ‘being determined outside of (the model under analysis)’, so it cannot be a property of variables per se. Rather, exogeneity is a step in model reduction, concerning when inferences about parameters of interest based on a complete analysis of the joint density function of all the observable variables coincide with inferences based on only the conditional density of one sub‐set of variables given another sub‐set. If there is no loss of information from only analysing the conditional sub‐model, then the conditioning variables are weakly exogenous for its parameters of interest, and the marginal process is irrelevant. To forecast conditionally more than one period ahead also requires Granger non‐causality, leading to the concept of strong exogeneity. To justify conditional policy analyses, which change the marginal model, parameter invariance is required in the conditional model, leading to super exogeneity.

This chapter asserts the importance of establishing the micro foundations of institutions so as to treat actors as potentially creative and innovative. Weber's concept of ideal types as one-sided accentuations of idealized forms of reality, possibly operating alongside Wahlverwandschaft, needs to be rediscovered and its implications for theory building recognized. This chapter discusses the often unrecognized functionalism of much neo-institutionalism, which is checked by giving an adequate role in the theory to power relations, social compromises, and other contingent results of social interaction. These considerations lead to an important hypothesis: that institutional heterogeneity will facilitate innovation, both by presenting actors with alternative strategies when existing paths seem blocked and by making it possible for them to make new combinations among elements of various paths. Finally, the problematic nature of taking for granted that the boundaries of nation states are the boundaries of institutions and systems of action is considered, and the importance of regarding endogeneity and exogeneity as a continuum is addressed.

The chapter provides analytical reasons for the service-led growth of the regional economy of Kerala emanating from migration and demographic transition. In an economy facing a labour shortage for household activities, the households would demand more ‘goods-intensive’ commodities than ‘time-intensive’ commodities. The increased demand for such goods and services is provided usually by trade and/or by local production, depending on the profitability of the activity and the availability of entrepreneurial skills in the region. Historically, entrepreneurial skills in the region have been low, resulting in more trading activity whenever there is an increase in demand. This is the source of service-led growth in the region. The tertiary sector growth is then subjected to econometric analysis, block exogeneity test, for determining whether the source is from within (endogenous) or outside (exogenous) the economy. The results confirm that the major share of national income originates from services that are determined exogenously and attributable to remittances by international migration.

Updates and tests whether DHSY and HUS specifications encompass the rational‐expectations, permanent‐income model by eliminating contemporaneous income terms. Both reject that model and lead to an improved specification using only lagged information. The ‘feedback versus feedforward’ debate is confronted as an issue of interpretation of the implications of economic analysis, rather than its use or absence, especially for intertemporal optimization by economic agents.

This tests the DHSY approach in another subject‐matter area (money demand) to investigate its ability to produce improved models and to encompass previous findings. ‘Simple‐to‐general’ modelling methods are criticized and contrasted with the outcome achieved by general‐to‐simple, sequentially reducing to parsimonious, constant, and encompassing equations. Contemporaneous conditioning is based on weak exogeneity and constancy is stressed as a model‐selection criterion. A successful test of the selected error‐correction transactions’ demand for money model on new data is reproduced from The Econometric Analysis of Economic Time Series.

Investigates the constructs of innovation errors, invariance, encompassing, and data admissibility, relates these to exogeneity and progressive research strategies, and introduces the notion of designing models to satisfy certain criteria to extend the manual of ‘good empirical practice’ through delineating more rigorous quality‐control procedures. Empirical models derive from the data generation process by reduction operations (such as marginalizing and conditioning), which induce transformed parameters and corresponding disturbance terms, which together determine the quality of an empirical model. A taxonomy of information sets exhaustively partitions available data into the six disjoint sets of the (relative) past, present, and future of the investigators own data, theory and measurement information, and evidence from rival models. Specific concepts correspond to each of the six elements in that partition, namely, innovation processes, exogeneity, invariance, theory consistency, data admissibility, and encompassing, These characterize the primary null hypotheses against which tests of different alternatives are conducted. Dynamic simulation is shown to be an inadequate model evaluation criterion.

This overview proposes a general framework linking economic analysis to a reduction‐based statistical methodology based on parameter change, expectations and contingent plans, conditioning and weak exogeneity. Both long‐run economic theory and dynamic adjustment are discussed and general‐to‐specific modelling is linked to the theory of reduction to clarify modelling and model‐related concepts. The statistical analysis extends the estimator generating formula to `incomplete’ linear models. A sequence of six expository themes interprets time‐series econometrics: models are derived as reductions from the process which actually generated the data, inducing parameter transformations which affect their constancy, invariance and interpretation; conditioning and weak exogeneity are linked to contingent plans of economic agents; an EGE covers estimation theory for linear sub‐systems; a typology of linear dynamic equations elucidates their relative properties; the efficient score describes diagnostic testing; and encompassing inter‐related empirical models.

The model class is summarized in terms of the properties of specific linear models, including cointegration and equilibrium (error) correction. Model evaluation is based on the associated information taxonomy, for sequential conditioning, exogeneity, invariance, constancy and recursivity, and encompassing. The theory of reduction provides a basis for general‐to‐specific modelling. Test types, modelling strategies, and system estimation are also briefly discussed.