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Historical Instruments and Contemporary Endogenous Regressors

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  • Gregory P. Casey
  • Marc P. B. Klemp

Abstract

We provide a simple framework for interpreting instrumental variable regressions when there is a gap in time between the impact of the instrument and the measurement of the endogenous variable, highlighting a particular violation of the exclusion restriction that can arise in this setting. In the presence of this violation, conventional IV regressions do not consistently estimate a structural parameter of interest. Building on our framework, we develop a simple empirical method to estimate the long-run effect of the endogenous variable. We use our bias correction method to examine the role of institutions in economic development, following Acemoglu et al. (2001). We find long-run coefficients that are smaller than the coefficients from the existing literature, demonstrating the quantitative importance of our framework.

Suggested Citation

  • Gregory P. Casey & Marc P. B. Klemp, 2020. "Historical Instruments and Contemporary Endogenous Regressors," CESifo Working Paper Series 8716, CESifo.
  • Handle: RePEc:ces:ceswps:_8716
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    Cited by:

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    More about this item

    Keywords

    long-run economic development; instrumental variable regression;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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