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Mastering Panel Metrics Causal Impact of Democracy on Growth

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Document pages: 8 pages

Abstract: The relationship between democracy and economic growth is of long-standinginterest. We revisit the panel data analysis of this relationship by Acemoglu,Naidu, Restrepo and Robinson (forthcoming) using state of the art econometricmethods. We argue that this and lots of other panel data settings in economicsare in fact high-dimensional, resulting in principal estimators -- the fixedeffects (FE) and Arellano-Bond (AB) estimators -- to be biased to the degreethat invalidates statistical inference. We can however remove these biases byusing simple analytical and sample-splitting methods, and thereby restore validstatistical inference. We find that the debiased FE and AB estimators producesubstantially higher estimates of the long-run effect of democracy on growth,providing even stronger support for the key hypothesis in Acemoglu, Naidu,Restrepo and Robinson (forthcoming). Given the ubiquitous nature of panel data,we conclude that the use of debiased panel data estimators should substantiallyimprove the quality of empirical inference in economics.

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