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Spurious Regressions and Near-Multicollinearity, with an Application to Aid, Policies and Growth

Explanatory variables with simple correlation coefficients with the dependent variable below 0.1 in absolute value (such as aid with economic growth) may have very large and statistically significant estimated parameters in multiple regressions, which are unifortunately "outliers driven" or 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 "Botswana outliers driven" Burnside and Dollar [2000] article which found that aid had an effect on growth only for countries achieving "good" macroeconomic policies.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2012/12078.pdf
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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 12078.

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Length: 24 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:mse:cesdoc:12078
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  1. Jean-Bernard Chatelain, 2010. "Can Statistics Do without Artefacts?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00750495, HAL.
  2. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  3. 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.
  4. repec:hal:wpaper:hal-00750495 is not listed on IDEAS
  5. repec:cup:cbooks:9780521452175 is not listed on IDEAS
  6. 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.
  7. Chatelain, Jean-Bernard, 2010. "Can statistics do without artefacts?," MPRA Paper 42867, University Library of Munich, Germany.
  8. repec:cup:cbooks:9780521002882 is not listed on IDEAS
  9. 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.
  10. 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.
  11. 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.
  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.
  13. T. D. Stanley, 2005. "Beyond Publication Bias," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 309-345, 07.
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