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Instrumental Variables in the Long Run

Gregory Casey () and Marc Klemp ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Long-Run Economic Growth; Instrumental Variable Regression (search for similar items in EconPapers)
JEL-codes: C10 C3 C30 O10 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-evo, nep-fdg and nep-gro
Date: 2016-01-07
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https://mpra.ub.uni-muenchen.de/68696/1/MPRA_paper_68696.pdf original version (application/pdf)

Related works:
Working Paper: Instrumental Variables in the Long Run (2018) Downloads
Working Paper: Instrumental Variables in the Long Run (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:68696

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