Investment ratio in growth equations

Abstract

In the cross-country and time series studies on the determinants of the growth rate, capital stock is often proxied with the investment ratio due to lack of reliable data. While investment ratio may give good results with OLS, their robustness is doubtful. In addition there are other problems: (a) investment ratio may be a good proxy for the change in capital stock, but combining it with the level of employment to estimate a production function leads to misspecification bias; (b) it is not possible to impose any valid constraints on the coefficients of these variables and (c) if instrument variables are used to minimize any endogenous variable bias, the equation with the investment ratio seems to be fragile.