On Causality and Robustness: Quantifying the causal effects between income, institutions and trade openness

Sammanfattning: We investigate bi-directional causality between GDP per capita, the Kaufmann Rule of Law Index and trade as share of GDP using the Granger causality test. A larger data set than previously used in studies on causality is employed. We find that the various causal relationships depend on the countries under examination. Furthermore we show that the instrumental variable method is insufficient in quantifying the effects of the reverse feedback from income to institutions and trade openness. Moreover, changing the source of data for the very same measure leads to substantially different point estimates when employing the two-stage least squares method. Altogether, the results highlight the importance of adequate robustness tests.