Introduction to Modern Economic Growth that the estimates of the coefficient vector β will contain information about the causal effects of various variables on economic growth For example, the fact that the schooling variables enter with positive coefficients in the estimates of regression (3.11) is interpreted as evidence that “schooling causes growth” The simplicity of the regression equations of the form (3.11) and the fact that they create an attractive bridge between theory and data have made them very popular over the past two decades Nevertheless, there are several problematic features with regressions of this form These include: (1) Most, if not all, of the variables in Xi,t as well as log yi,t−1 , are econometrically endogenous in the sense that they are jointly determined with the rate of economic growth between dates t − and t For example, the same fac- tors that make the country relatively poor in 1950, thus reducing log yi,t−1 , should also affect its growth rate after 1950 Or the same factors that make a country invest little in physical and human capital could have a direct effect on its growth rate (through other channels such as its technology or the efficiency with which the factors of production are being utilized) This creates an obvious source of bias (and lack of econometric consistency) in the regression estimates of the coefficients This bias makes it unlikely that the effects captured in the coefficient vector β correspond to causal effects of these characteristics on the growth potential of economies One may argue that the convergence coefficient b1 is of interest, even if it does not have a “causal interpretation” This argument is not entirely compelling, however A basic result in econometrics is that if Xi,t is econometrically endogenous, so that the parameter vector β is estimated inconsistently, the estimate of the parameter b1 will also be inconsistent unless Xi,t is independent from log yi,t−1 This makes the estimates of the convergence coefficient, b1 , hard to interpret 1An example of the endogeneity of these variables will be given in Section 3.4 below 113