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ENDOGENEITY Development Workshop

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Steps to do today 1. We have two files (trade equation and growth equation) 2. In trade file we only have cty1

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Step by step Use the trade data sort cty1 cty2 year Using auxiliary files to get only those variables/periods that you need („hygene”) outfile cty1 cty2 ccode1 ccode2 year cu lvalue ldist rgdppc1 rgdppc2 pop1 pop2 comlang border regional areap ll island using pomocniczy, replace dictionary

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Stage 1 – prepare the files to run gravity models infile using auxiliary_file sort cty1 cty2 year save pomocniczy1, replace rename ccode1 crap rename ccode2 ccode1 … save auxiliary_file2,replace

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Stage 2 – combine the „mirror” files Merge aux1 and aux2 – use auxiliary1 – append using auxiliary2 – sort cty1 cty2 What will we want as fitted variables? – ln(trade) or trade/GDP % /What did Frankel & Rose do?/

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Stage 3 – gen some variables and run the regressions Gen some needed variables Run the regression to get the fitted values… – areg lhs ldist lpop2 comlang border areap ll if (cty1

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Stage 4 – get trade for each reporting country Somehow sum it over reporting country – sort cty1 cty2 – egen elhsfs=sum(elhsf), by(cty1) Merge it with growth data – Use growth data and merge – merge ccode year using auxiliary_file3 Let’s see how the merging went… – tab _merge Houston, we have a problem

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Stage 5 – prepare „panel” data Somehow get rid of the duplicates (preferably not manually) – duplicates list – duplicates drop, force Somehow get from annual data to five-year averages – we can’t just drop every four out of five observations – we need to do it for many variables, so loops would be usefull – What did F&R do in their paper?

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Stage 6 – get finally to see if trade matters for income/growth Syntax in STATA – ivregress y (x1 x2 x3= z1 z2 z3 z4) x4 x5 x6 We run a regression in which – y is explained – x1, x2, x3 are endogenous (instrumented for) – z1, z2, z3 are exogenous (instruments) – x3, x4 x5 are exogenous too (do not need to be instrumented)

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Summary Learned already – egen – loops – duplicates list/drop – encode Still to work out – difference-in-difference approach – microeconometrics

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Papers Ann Harrison, Opennes and growth: A time-series, cross-country analysis of developing countries, Journal of Development Economics, 1996 Jeffrey Frankel i David Romer, Does Trade Cause Growth?, AER 1999 Jeffrey Frankel i Andrew K. Rose, One Money, One Currency,

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