Spurious Regressions and Panel IV Estimation: Revisiting the Causes of Conflict

Abstract

Abstract The long-recognised spurious regression problem can lead to mistaken inference in panel instrumental variable estimation. Spurious correlations arising from correlated cycles in finite time horizons can make irrelevant instruments appear strong with signable consequences for estimated instrumental variable coefficients, or interfere with valid inference of causal effects from instrumental variable coefficients estimated using relevant instruments. The inclusion of time fixed effects in interacted specifications does not always resolve these problems. We demonstrate these concerns by revisiting recent studies of the causal origins of conflict. We offer diagnostic and corrective recommendations for avoiding the pitfalls arising from time series exhibiting persistence.