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Evaluating ingenious instruments for fundamental determinants of long-run economic growth and development

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  • P. Dorian Owen

    (Department of Economics, University of Otago, New Zealand)

Abstract

The empirical literature on the determinants of cross-country differences in long-run development is characterized by the ingenious nature of many of the instruments used. However, scepticism remains about their ability to provide a valid basis for causal inference. This paper examines the extent to which explicit consideration of the statistical adequacy of the underlying reduced form (RF), which provides an embedding framework for the structural equations, can usefully complement economic theory as a basis for assessing instrument choice in the fundamental determinants literature. Diagnostic testing of RFs in influential studies reveals evidence of model misspecification, with parameter non-constancy and spatial dependence of the residuals almost ubiquitous. This feature, surprisingly not previously identified, potentially undermines inferences about the structural parameters, such as the quantitative and statistical significance of different fundamental determinants.

Suggested Citation

  • P. Dorian Owen, 2015. "Evaluating ingenious instruments for fundamental determinants of long-run economic growth and development," Working Papers 1508, University of Otago, Department of Economics, revised Dec 2015.
  • Handle: RePEc:otg:wpaper:1508
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    Keywords

    Fundamental determinants of economic development; long-run economic growth; instrumental variables; reduced form; statistical adequacy;
    All these keywords.

    JEL classification:

    • 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
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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