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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 with economic growth) may have very large and 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 "�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: http://mpra.ub.uni-muenchen.de/42533/1/MPRA_paper_42533.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42533.

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Date of creation: 08 Nov 2012
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Handle: RePEc:pra:mprapa:42533
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  1. repec:hal:wpaper:hal-00750495 is not listed on IDEAS
  2. 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.
  3. 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.
  4. T. D. Stanley, 2005. "Beyond Publication Bias," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 309-345, 07.
  5. Hristos Doucouliagos & Martin Paldam, 2005. "Conditional Aid Effectiveness. A Meta Study," Economics Working Papers 2005-14, School of Economics and Management, University of Aarhus.
  6. repec:cup:cbooks:9780521002882 is not listed on IDEAS
  7. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  8. Jean-Bernard Chatelain, 2010. "Can Statistics Do without Artefacts?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00750495, HAL.
  9. 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.
  10. repec:cup:cbooks:9780521452175 is not listed on IDEAS
  11. 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.
  12. 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.
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