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

Abstract

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.

Keywords: Economic growth, Econometric models, Exports, Export sophistication, Weak instrument, Models with Panel Data, Single Equation Models: Single Variables: Instrumental Variables (IV) Estimation

JEL Classification: O47, C23, C26