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Model Discovery and Trygve Haavelmo's Legacy

  • David Hendry
  • Soren Johansen

Trygve Haavelmo's Probability Approach aimed to implement economic theories, but he later recognized their incompleteness. Although he did not explicitly consider model selection, we apply it when theory-relevant variables, {xt}, are retained without selection while selecting other candidate variables, {wt}. Under the null that the {wt} are irrelevant, by orthogonalizing with respect to the {xt}, the estimator distributions of the xt's parameters are unaffected by selection even for more variables than observations and for endogenous variables. Under the alternative, when the joint model nests the generating process, an improved outcome results from selection. This implements Haavelmo's program relatively costlessly.

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File URL: http://www.economics.ox.ac.uk/materials/papers/5732/paper598.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 598.

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Date of creation: 01 Mar 2012
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Handle: RePEc:oxf:wpaper:598
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