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Instrumental Variables in the Long Run

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  • Casey, Gregory
  • Klemp, Marc

Abstract

In the field of long-run economic growth, it is common to use historical or geographical variables as instruments for contemporary endogenous regressors. We study the interpretation of these conventional instrumental variable (IV) regressions in a simple, but general, framework. We are interested in estimating the long-run causal effect of changes in historical conditions. For this purpose, we develop an augmented IV estimator that accounts for the degree of persistence in the endogenous regressor. We apply our results to estimate the long-run effect of institutions on economic performance. Using panel data, we find that institutional characteristics are imperfectly persistent, implying that conventional IV regressions overestimate the long-run causal effect of institutions. When applying our augmented estimator, we find that increasing constraints on executive power from the lowest to the highest level on the standard index increases national income per capita three centuries later by 1.2 standard deviations.

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  • Casey, Gregory & Klemp, Marc, 2016. "Instrumental Variables in the Long Run," MPRA Paper 68696, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:68696
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    Cited by:

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    3. Gregory J. Wawro & Ira Katznelson, 2020. "American political development and new challenges of causal inference," Public Choice, Springer, vol. 185(3), pages 299-314, December.
    4. Beatriz Barrado & Gregorio Gimenez & Jaime Sanaú, 2021. "The Use of Decomposition Methods to Understand the Economic Growth Gap between Latin America and East Asia," Sustainability, MDPI, vol. 13(12), pages 1-18, June.

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    More about this item

    Keywords

    Long-Run Economic Growth; Instrumental Variable Regression;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • 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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