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Spurious regressions and near-multicollinearity, with an application to aid, policies and growth

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  • Chatelain, Jean-Bernard
  • Ralf, Kirsten

Abstract

In multiple regressions, explanatory variables with simple correlation coefficients with the dependent variable below 0.1 in absolute value (such as aid/gross domestic product (GDP) with GDP growth) face a problem of parameter identification. They may have very large, statistically significant, estimated parameters which are unfortunately “outliers driven” and spurious. This is obtained by including another regressor which is highly correlated with the initial regressor, such as a lag, a square or interaction terms of this regressor. The analysis is applied on the “Gambia and Botswana outliers driven” Burnside and Dollar (2000) article which found that aid/GDP had an effect on growth only for countries achieving “good” macroeconomic policies.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 39 (2014)
Issue (Month): PA ()
Pages: 85-96

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Handle: RePEc:eee:jmacro:v:39:y:2014:i:pa:p:85-96

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Spurious regressions; Parameter identification problem; Hypothesis testing; Unstable conditional independence; Near-multicollinearity; Aid-growth relationship;

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References

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  1. Friedman, Lynn & Wall, Melanie, 2005. "Graphical Views of Suppression and Multicollinearity in Multiple Linear Regression," The American Statistician, American Statistical Association, vol. 59, pages 127-136, May.
  2. repec:hal:cesptp:hal-00750495 is not listed on IDEAS
  3. Hristos Doucouliagos & Martin Paldam, 2005. "Conditional Aid Effectiveness. A Meta Study," Economics Working Papers 2005-14, School of Economics and Management, University of Aarhus.
  4. Jean-Bernard Chatelain & Kirsten Ralf, 2010. "Inference on Time-Invariant Variables using Panel Data: A Pre-Test Estimator with an Application to the Returns to Schooling," PSE Working Papers hal-00492039, HAL.
  5. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  6. Aris Spanos, 2006. "Revisiting the omitted variables argument: Substantive vs. statistical adequacy," Journal of Economic Methodology, Taylor & Francis Journals, vol. 13(2), pages 179-218.
  7. Chatelain, Jean-Bernard, 2010. "Can statistics do without artefacts?," MPRA Paper 42867, University Library of Munich, Germany.
  8. Samuel Bazzi & Michael A. Clemens, 2013. "Blunt Instruments: Avoiding Common Pitfalls in Identifying the Causes of Economic Growth," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 152-86, April.
  9. Hoover,Kevin D., 2001. "Causality in Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521452175, April.
  10. Hristos Doucouliagos & Martin Paldam, 2005. "Aid Effectiveness on Growth. A Meta Study," Economics Working Papers 2005-13, School of Economics and Management, University of Aarhus.
  11. repec:hal:wpaper:hal-00750495 is not listed on IDEAS
  12. T. D. Stanley, 2005. "Beyond Publication Bias," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 309-345, 07.
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Citations

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Cited by:
  1. Azizi, Karim & Canry, Nicolas & Chatelain, Jean-Bernard & Tinel, Bruno, 2013. "Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions," EconStor Preprints 72550, ZBW - German National Library of Economics.
  2. Jean-Bernard Chatelain & Kirsten Ralf, 2012. "The Failure of Financial Macroeconomics and What to Do About it," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00706777, HAL.
  3. repec:hal:cesptp:hal-00818474 is not listed on IDEAS
  4. repec:hal:cesptp:hal-00750495 is not listed on IDEAS
  5. Jean-Bernard Chatelain & Kirsten Ralf, 2012. "Les liaisons fallacieuses : quasi-colinéarité et « suppresseur classique », aide au développement et croissance," Documents de travail du Centre d'Economie de la Sorbonne 12011, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  6. repec:hal:journl:halshs-00706777 is not listed on IDEAS
  7. Chatelain, Jean-Bernard, 2010. "Can statistics do without artefacts?," MPRA Paper 42867, University Library of Munich, Germany.
  8. repec:hal:journl:halshs-00674011 is not listed on IDEAS
  9. repec:hal:wpaper:hal-00818474 is not listed on IDEAS
  10. Ziesemer, Thomas, 2012. "The impact of development aid on education and health: Survey and new evidence from dynamic models," MERIT Working Papers 057, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  11. repec:hal:wpaper:hal-00750495 is not listed on IDEAS

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