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

Dorian Owen

No 1508, Working Papers from University of Otago, Department of Economics

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.

Keywords: Fundamental determinants of economic development; long-run economic growth; instrumental variables; reduced form; statistical adequacy (search for similar items in EconPapers)
JEL-codes: C36 O10 O40 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2015-12, Revised 2015-12
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http://www.otago.ac.nz/economics/otago416601.pdf First version, 2015 (application/pdf)

Related works:
Journal Article: Evaluating Ingenious Instruments for Fundamental Determinants of Long-Run Economic Growth and Development (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:otg:wpaper:1508

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