TRYGVE HAAVELMO’S EXPERIMENTAL METHODOLOGY AND SCENARIO ANALYSIS IN A COINTEGRATED VECTOR AUTOREGRESSION

Abstract

The paper provides a careful, analytical account of Trygve Haavelmo’s use of the analogy between controlled experiments common in the natural sciences and econometric techniques. The experimental analogy forms the linchpin of the methodology for passive observation that he develops in his famous monograph,The Probability Approach in Econometrics(1944). Contrary to some recent interpretations of Haavelmo’s method, the experimental analogy does not commit Haavelmo to a strong apriorism in which econometrics can only test and reject theoretical hypotheses, rather it supports the acquisition of knowledge through a two-way exchange between theory and empirical evidence. Once the details of the analogy are systematically understood, the experimental analogy can be used to shed light on theory-consistent cointegrated vector autoregression (CVAR) scenario analyses. A CVAR scenario analysis can be interpreted as a clear example of Haavelmo’s ‘experimental’ approach; and, in turn, it can be shown to extend and develop Haavelmo’s methodology and to address issues that Haavelmo regarded as unresolved.