Economic Growth Regressions for the American States: A Sensitivity Analysis

Abstract

We use extreme-bounds analysis to assess the sensitivity of numerous control variables identified in the state growth literature. We employ annual panel data on the American states to identi& which variables are robust to small changes in the conditioning information set. The results provide a set of core variables as a starting point for future research that relies on state growth regressions. Thefindings also demonstrate that several important conclusions in the literature depend on how variables are measured. (JEL R11, 023, C23, 018)

The Robust Relationship between Taxes and U.S. State Income Growth

“…That being said, it is well known that coefficient estimates are often highly dependent upon the particular set of variables included in the regression equation (Leamer, 1985;Levine and Renelt, 1992;Crain and Lee, 1999;Sala-i-Martin, 2004). To address this problem, I employ model selection criteria to determine variable selection.…”

“…2 A related issue concerns how to defi ne the length of a time period for time series observations of states. Previous research on state-level taxes and growth has relied almost exclusively on either cross-sectional (e.g., Romans and Subrahmanyam, 1979;Mullen and Williams, 1994;Yamarik, 2000) or annual panel data (e.g., Helms, 1985;Crain and Lee, 1999).…”

“…Panel data are potentially characterized by complex error structures. Most previous research on fi scal policy uses Ordinary Least Squares (OLS) (e.g., Garcia-Milá and McGuire, 1992;Chernick, 1997;Crain and Lee, 1999), or OLS with standard errors corrected for general heteroscedasticity (e.g., Aschauer, 2000;Tomljanovich, 2004) or serial correlation (Evans and Karras, 1994). A few studies employ feasible Generalized Least Squares (FGLS) to address random effects (Garcia-Milá et al, 1996;Helms, 1985;Holtz-Eakin, 1994), though this procedure is usually rejected in favor of OLS with fi xed effects.…”

“…Bania et al (2007) employ the unemployment rate, percentage of the population that is working age, and union membership rates. Only Chernick (1997) and, notably, Crain andLee (1999) have a broad set of control variables. My study includes an extensive set of control variables to avoid problems of bias associated with omitted variables.…”

Solow or Lucas? Testing speed of convergence on a panel of OECD countries

“…There are only few examples of growth regressions based on pooled cross-section and annual time-series data (e.g. Lee et al, 1997;Crain andLee, 1999, Bond et al, 2004).…”