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Endogenous Policy and Cross-Country Growth Empirics

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  • Rehme, Günther

Abstract

In this paper it is shown that it matters a lot for empirical research whether policy is taken to be exogenously set or to be endogenous. In the model investment depends on policy which depends on economically important fundamentals and is, thus, endogenous. Conditioning on factor accumulation in growth regressions that also include endogenous policy variables may then be problematic. When policy is endogenous the measured effects of policy on growth will generally be biased. Based on the model and OECD data, the signs of the biases for tax variables related to the tax base and for redistribution are derived. Based on these signed biases the paper discusses some empirical results that seem puzzling from a theoretical viewpoint. The paper argues that regressing growth on policy may still yield important information if policy endogeneity is taken account of.

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  • Rehme, Günther, 2009. "Endogenous Policy and Cross-Country Growth Empirics," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 77433, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:77433
    Note: for complete metadata visit https://tubiblio.ulb.tu-darmstadt.de/77433/
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    Cited by:

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    4. Si, Shuyang & Lyu, Mingjie & Lin Lawell, C.-Y. Cynthia & Chen, Song, 2021. "The effects of environmental policies in China on GDP, output, and profits," Energy Economics, Elsevier, vol. 94(C).
    5. Toshiki Tamai, 2015. "Redistributive taxation, wealth distribution, and economic growth," Journal of Economics, Springer, vol. 115(2), pages 133-152, June.
    6. Sebastián Fleitas & Andrés Rius & Carolina Román & Henry Willebald, 2013. "Contract enforcement, investment and growth in Uruguay since 1870," Documentos de Trabajo (working papers) 13-01, Instituto de Economía - IECON.
    7. Si, Shuyang & Lyu, Mingjie & Lin Lawell, C.-Y. Cynthia & Chen, Song, 2018. "The effects of energy-related policies on energy consumption in China," Energy Economics, Elsevier, vol. 76(C), pages 202-227.
    8. Cavusoglu, Nevin, 2012. "LISREL growth model on direct and indirect effects using cross-country data," Economic Modelling, Elsevier, vol. 29(6), pages 2362-2370.

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    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • D3 - Microeconomics - - Distribution
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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