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

  • Chatelain, Jean-Bernard
  • Ralf, Kirsten

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  2. 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.
  3. repec:cup:cbooks:9780521452175 is not listed on IDEAS
  4. repec:hal:wpaper:hal-00750495 is not listed on IDEAS
  5. T. D. Stanley, 2005. "Beyond Publication Bias," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 309-345, 07.
  6. repec:cup:cbooks:9780521002882 is not listed on IDEAS
  7. 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.
  8. Hristos Doucouliagos & Martin Paldam, 2010. "Conditional aid effectiveness: A meta-study," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(4), pages 391-410.
  9. 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.
  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. Chatelain, Jean-Bernard, 2010. "Can statistics do without artefacts?," MPRA Paper 42867, University Library of Munich, Germany.
  12. 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.
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