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Spurious regressions and near-multicollinearity, with an application to aid, policies and growth

Author

Listed:
  • Jean-Bernard Chatelain

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Kirsten Ralf

    (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)

Abstract

In multiple regressions, explanatory variables with simple correlation coefficients with the dependent variable below 0.1 in absolute value (such as aid/gross domestic product (GDP) with GDP growth) face a problem of parameter identification. They may have very large, statistically significant, estimated parameters which are unfortunately "outliers driven" and spurious. This is obtained by including another regressor which is highly correlated with the initial regressor, such as a lag, a square or interaction terms of this regressor. The analysis is applied on the "Gambia and Botswana outliers driven" Burnside and Dollar (2000) article which found that aid/GDP had an effect on growth only for countries achieving "good" macroeconomic policies.

Suggested Citation

  • Jean-Bernard Chatelain & Kirsten Ralf, 2014. "Spurious regressions and near-multicollinearity, with an application to aid, policies and growth," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00978147, HAL.
    • Handle: RePEc:hal:cesptp:hal-00978147
    DOI: 10.1016/j.jmacro.2013.11.003
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    References listed on IDEAS

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    1. Chatelain, Jean-Bernard, 2010. "Can statistics do without artefacts?," MPRA Paper 42867, University Library of Munich, Germany.
    2. Hristos Doucouliagos & Martin Paldam, 2010. "Conditional aid effectiveness: A meta-study," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(4), pages 391-410.
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    6. Hristos Doucouliagos & Martin Paldam, 2005. "Aid Effectiveness on Growth. A Meta Study," Economics Working Papers 2005-13, Department of Economics and Business Economics, Aarhus University.
    7. Jean-Bernard Chatelain & Kirsten Ralf, 2010. "Inference on Time-Invariant Variables using Panel Data: A Pre-Test Estimator with an Application to the Returns to Schooling," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00492039, HAL.
    8. Friedman, Lynn & Wall, Melanie, 2005. "Graphical Views of Suppression and Multicollinearity in Multiple Linear Regression," The American Statistician, American Statistical Association, vol. 59, pages 127-136, May.
    9. Hoover,Kevin D., 2001. "Causality in Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521452175.
    10. Aris Spanos, 2006. "Revisiting the omitted variables argument: Substantive vs. statistical adequacy," Journal of Economic Methodology, Taylor & Francis Journals, vol. 13(2), pages 179-218.
    11. Samuel Bazzi & Michael A. Clemens, 2013. "Blunt Instruments: Avoiding Common Pitfalls in Identifying the Causes of Economic Growth," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 152-186, April.
    12. David Roodman, 2008. "Through the Looking-Glass, and What OLS Found There: On Growth, Foreign Aid, and Reverse Causality," Working Papers 137, Center for Global Development.
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    Citations

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    Cited by:

    1. Chatelain, Jean-Bernard, 2010. "Can statistics do without artefacts?," MPRA Paper 42867, University Library of Munich, Germany.
    2. Thomas Ziesemer, 2016. "The Impact of Development Aid on Education and Health: Survey and New Evidence for Low‐income Countries from Dynamic Models," Journal of International Development, John Wiley & Sons, Ltd., vol. 28(8), pages 1358-1380, November.
    3. Azizi, Karim & Canry, Nicolas & Chatelain, Jean-Bernard & Tinel, Bruno, 2013. "Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions," MPRA Paper 46519, University Library of Munich, Germany.
    4. Gille, Véronique, 2015. "Distribution of human capital and income: An empirical study on Indian States," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 239-256.
    5. John Komlos, 2020. "Multicollinearity in the Presence of Errors-in-Variables Can Increase the Probability of Type-I Error," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 63(1), pages 1-17.
    6. Jean-Bernard Chatelain & Kirsten Ralf, 2012. "Les liaisons fallacieuses : quasi-colinéarité et « suppresseur classique », aide au développement et croissance," Revue économique, Presses de Sciences-Po, vol. 63(3), pages 557-567.
    7. Jean-Bernard Chatelain & Kirsten Ralf, 2012. "The Failure Of Financial Macroeconomics And What To Do About It," Manchester School, University of Manchester, vol. 80, pages 21-53, September.
    8. Maxime Fajeau, 2021. "Too much finance or too many weak instruments?," International Economics, CEPII research center, issue 165, pages 14-36.
    9. Kunal Y. Sevak & LaKami Baker, 2022. "Need‐resource indicators and nonprofit human services organization density," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 93(1), pages 129-160, March.
    10. Massimiliano Giacalone & Demetrio Panarello & Raffaele Mattera, 2018. "Multicollinearity in regression: an efficiency comparison between Lp-norm and least squares estimators," Quality & Quantity: International Journal of Methodology, Springer, vol. 52(4), pages 1831-1859, July.
    11. Solomon Samanhyia & Danny Cassimon, 2019. "The Effect of Aid on Growth in the Presence of Economic Regime Change," The African Finance Journal, Africagrowth Institute, vol. 21(2), pages 1-23.
    12. Pauline Grosjean & Rose Khattar, 2014. "It's Raining Men! Hallelujah?," Discussion Papers 2014-29A, School of Economics, The University of New South Wales.
    13. Öhler, Hannes, 2017. "A micro-level analysis of the effects of aid fragmentation and aid alignment," IDOS Discussion Papers 7/2017, German Institute of Development and Sustainability (IDOS).
    14. Pauline Grosjean & Rose Khattar, 2014. "It's Raining Men! Hallelujah?," Discussion Papers 2014-29B, School of Economics, The University of New South Wales.
    15. María Franco Chuaire & Carlos Scartascini & Mariano Tommasi, 2017. "State capacity and the quality of policies. Revisiting the relationship between openness and government size," Economics and Politics, Wiley Blackwell, vol. 29(2), pages 133-156, July.
    16. Shaomeng Jia & Claudia R. Williamson, 2019. "Aid, Policies, And Growth: Why So Much Confusion?," Contemporary Economic Policy, Western Economic Association International, vol. 37(4), pages 577-599, October.
    17. Hao Jin & Si Zhang & Jinsuo Zhang, 2017. "Spurious regression due to neglected of non-stationary volatility," Computational Statistics, Springer, vol. 32(3), pages 1065-1081, September.
    18. Pauline Grosjean & Rose Khattar, 2014. "It's Raining Men! Hallelujah?," Discussion Papers 2014-29C, School of Economics, The University of New South Wales.
    19. Pauline Grosjean & Rose Khattar, 2014. "It's Raining Men! Hallelujah?," Discussion Papers 2014-29, School of Economics, The University of New South Wales.
    20. Jean-Bernard Chatelain & Kirsten Ralf, 2012. "Les liaisons fallacieuses : quasi-colinéarité et « suppresseur classique », aide au développement et croissance," Documents de travail du Centre d'Economie de la Sorbonne 12011, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

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    More about this item

    Keywords

    Spurious regressions; Parameter identification problem; Hypothesis testing; Unstable conditional independence; Near-multicollinearity; Aid-growth relationship;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • P45 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - International Linkages

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