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Sharp Instrument: A Stab at Identifying the Causes of Economic Growth

Author/Editor:

Reda Cherif ; Fuad Hasanov ; Lichen Wang

Publication Date:

May 21, 2018

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

We shed new light on the determinants of growth by tackling the blunt and weak instrument problems in the empirical growth literature. As an instrument for each endogenous variable, we propose average values of the same variable in neighboring countries. This method has the advantage of producing variable-specific and time-varying—namely, “sharp”—and strong instruments. We find that export sophistication is the only robust determinant of growth among standard growth determinants such as human capital, trade, financial development, and institutions. Our results suggest that other growth determinants may be important to the extent they help improve export sophistication.

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