Blunt Instruments: On Establishing the Causes of Economic Growth

Michael A. Clemens and Samuel Bazzi

No 171, Working Papers from Center for Global Development

Abstract: Despite intense concern that many instrumental variables used in growth regressions may be weak, invalid, or both, top journals continue to publish studies of economic growth based on problematic instruments. Doing so risks pushing the entire literature closer to irrelevance. We illustrate hidden problems with identification in recent prominently published and widely cited growth studies using their original data. We urge researchers to take three steps to overcome the shortcomings: grounding research in somewhat more generalized theoretical models, deploying the latest methods to test sensitivity to violations of the exclusion restriction, and opening the “black box” of the Generalized Method of Moments (GMM) with supportive evidence of instrument strength.

Keywords: IV; instrumental variables; 2SLS; two-stage least squares; Generalized Method of Moments; GMM; Blundell-Bond; Arellano-Bond; exclusion restriction; economic growth; regression; weak instruments; valid instruments; overidentification; underidentification; identification problem; growth determinants; foreign aid; institutions; geography; legal origins; too many instruments. (search for similar items in EconPapers)
JEL-codes: F35 C12 O4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-ecm and nep-fdg
Date: 2009-05

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Persistent link: http://EconPapers.repec.org/RePEc:cgd:wpaper:171

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