1. ENDOGENEITY Development Workshop

2. Steps to do today 1. We have two files (trade equation and growth equation) 2. In trade file we only have cty1<cty2, and we need „the other half” too 3. We will run a simple gravity model to get fitted value of trade for each COUPLE. 4. Then we need to aggregate it for each reporting country (each year too) 5. Then we can merge the fitted trade data with the growth equation data and try to run the final regression. 6. Quite a few tricks – stay tuned

3. 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

4. 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

5. 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?/

6. 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<cty2), robust a(year) – predict lhsf – label var lhsf "Fitted LHS” Why areg and not xtreg? This is log of trade – we need trade…. – gen elhsf=exp(lhsf)

7. 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

8. 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?

9. 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)

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

11. 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,