Weak Instruments in Growth Regressions : Implications for Recent Cross-Country Evidence on Inequality and Growth
This paper revisits four recent cross-country empirical studies on the effects of inequality on growth. All four studies report strongly significant negative effects, using the popular system generalized method of moments estimator that is frequent...
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| Language: | English en_US |
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World Health Organization
2015
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| Online Access: | http://documents.worldbank.org/curated/en/2015/11/25462798/weak-instruments-growth-regressions-implications-recent-cross-country-evidence-inequality-growth http://hdl.handle.net/10986/23456 |
| Summary: | This paper revisits four recent
cross-country empirical studies on the effects of inequality
on growth. All four studies report strongly significant
negative effects, using the popular system generalized
method of moments estimator that is frequently used in
cross-country growth empirics. This paper shows that the
internal instruments relied on by this estimator in these
inequality-and-growth regressions are weak, and that weak
instrument-consistent confidence sets for the effect of
inequality on growth include a wide range of positive and
negative values. This suggests that strong conclusions about
the effect of inequality on growth— in either
direction—cannot be drawn from these studies. This paper
also systematically explores a wide range of alternative
sets of internal instruments, and finds that problems of
weak instruments are pervasive across these alternatives.
More generally, the paper illustrates the importance of
documenting instrument strength, basing inferences on
procedures that are robust to weak instruments, and
considering alternative instrument sets when using the
system generalized method of moments estimator for
cross-country growth empirics. |
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