Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/198829 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7469
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
In absence of randomized controlled experiments, identification is often aimed via instrumental variable (IV) strategies, typically two-stage least squares estimations. According to Bayes’ rule, however, under a low ex ante probability that a hypothesis is true (e.g. that an excluded instrument is partially correlated with an endogenous regressor), the interpretation of the estimation results may be fundamentally flawed. This paper argues that rigorous theoretical reasoning is key to design credible identification strategies, aforemost finding candidates for valid instruments. We discuss prominent IV analyses from the macro-development literature to illustrate the potential benefit of structurally derived IV approaches.
Subjects: 
Bayes’ rule
economic development
identification
instrumental variable estimation
macroeconomic theory
JEL: 
C10
C36
O11
Document Type: 
Working Paper
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