To study the determinants of growth between the countries of the world, researchers have used panels of countries and observations spanning over long periods of time (e.g. 1965-1975, 1975-1985, 1985-1990). Some of these studies have focused on the effect that inflation has on growth and found that although the effect is small for a given time period, it accumulates over time and therefore has an important negative effect.
(a)Explain why the OLS estimator may be biased in this case.
(b)Explain how methods using panel data could potentially alleviate the problem.
(c)Some authors have suggested using an index of central bank independence as an instrumental. Discuss whether or not such an index would be a valid instrument.

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The Answer of To study the determinants of growth between the countries of the world, researchers have used panels of countries and observations spanning over long periods of time (e.g. 1965-1975, 1975-1985, 1985-1990). Some of these studies have focused on the effect that inflation has on growth and found that although the effect is small for a given time period, it accumulates over time and therefore has an important negative effect.
(a)Explain why the OLS estimator may be biased in this case.
(b)Explain how methods using panel data could potentially alleviate the problem.
(c)Some authors have suggested using an index of central bank independence as an instrumental. Discuss whether or not such an index would be a valid instrument.

To Study the Determinants of Growth Between the Countries of the World