Techniques for dealing with reverse causality between institutions and economic performance
Luciana Cingolani & Denis de Crombrugghe
This article provides a succinct review of the arguments stressing the
mutual relationship between institutions and economic performance, and a
scholarly account of some of the most popular econometric strategies
used to minimize reversed causality problems in impact estimation. Among
the techniques revisited we find the instrumental variables (IV)
approach, distributed lags and vector autoregressions (VAR),
quasi-experiments, and identification by heteroskedasticity (IH).
Ultimately, the review is conceived as a methodological aide to
researchers seeking to explore causal relationships through the use of
the Institutional Profiles Database (IPD) produced by the Agence
Francaise de Developpement (AFD).
Keywords: Institutions and growth, endogeneity, instrumental variables, dynamic analysis, identification through heteroskedasticity.
JEL codes: O42, C33, C36, P14