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Historical Instruments and Contemporary Endogenous Regressors

Gregory Casey () and Marc Klemp ()

No 2021-02, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: We provide a simple framework for interpreting instrumental variable regressions when there is a gap in time between the impact of the instrument and the measurement of the endogenous variable, highlighting a particular violation of the exclusion restriction that can arise in this setting. In the presence of this violation, conventional IV regressions do not consistently estimate a structural parameter of interest. Building on our framework, we develop a simple empirical method to estimate the long-run effect of the endogenous variable. We use our bias correction method to examine the role of institutions in economic development, following Acemoglu et al. (2001). We find long-run coefficients that are smaller than the coefficients from the original work, demonstrating the quantitative importance of our framework.

Keywords: Long-Run Economic Development; Instrumental Variable Regression (search for similar items in EconPapers)
JEL-codes: C10 C30 O10 O40 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2021-01-14
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