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MODEL DISCOVERY AND TRYGVE HAAVELMO’S LEGACY

Published online by Cambridge University Press:  20 June 2014

David F. Hendry and
Søren Johansen
David F. Hendry*
Affiliation:
University of Oxford
Søren Johansen
Affiliation:
University of Copenhagen and Aarhus University
*
*Address correspondence to David F. Hendry, Institute for New Economic Thinking, University of Oxford, Eagle House, Walton Well Road, Oxford OX2 6ED, UK. email: david.hendry@nuffield.ox.ac.uk
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Abstract

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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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ARTICLES
Information
Econometric Theory , Volume 31 , Issue 1: Haavelmo Memorial Issue: Part One , February 2015, pp. 93 - 114
Copyright
Copyright © Cambridge University Press 2014 

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