Model discovery and Trygve Haavelmo's legacy

Working paper

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.

Authors: Hendry, D; Johansen, S

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2012-03-01
• Paper number: 598
• Keywords: theory retention; Trygve Haavelmo; model discovery; autometrics; impulse-indicator saturation