"Blunt Instruments: Avoiding Common Pitfalls in Identifying the Causes of Economic Growth"
by Samuel Bazzi and Michael Clemens is an interesting read. I have long thought that it is hard to find valid instrumental variables in macroeconomics, this paper provides lots of evidence for this.

So-called "endogeneity" of explanatory variables in regression analysis is mainly due to the following:

Of course, there is much more in the paper, but I think that is the key point.

So-called "endogeneity" of explanatory variables in regression analysis is mainly due to the following:

- Reverse causality - Feedback from the dependent variable to the explanatory variable.
- Omitted variables bias - When variables that are correlated with the included variables and the dependent variable are excluded from the regression, the included variables are attributed as explaining too much or too little of the variance in the dependent variable.
- Measurement error - When there is error in measuring the explanatory variables their regression coefficients tend to be biased towards zero.

Of course, there is much more in the paper, but I think that is the key point.

David - I'm having problems with the link to the paper (in line one).

ReplyDeleteThanks for pointing it out, I fixed the doi.

DeleteMany thanks! DG

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