Spurious regressions and near-multicollinearity, with an application to aid, policies and growth
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  article which found that aid/GDP had an effect on growth only for countries achieving "good" macroeconomic policies.
Volume (Year): (2014)
Issue (Month): ()
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- 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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Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
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American Economic Review,
American Economic Association, vol. 90(4), pages 847-868, September.
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- 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.
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