Long-standing questions about the identification of underlying causal effects (related to reverse causality and to unmeasured differences in nations’ culture and economic institutions) arise and must be addressed. This chapter assesses the endogeneity issues from a number of additional angles by applying a series of approaches to identification of causal parameters that are now common in microeconometric studies to the macroeconomic analysis of growth. First, relying on skill variation stemming from institutional school policies in the countries, instrumental-variable models highlight the role of schools while addressing issues of simple reverse causality and of inherent cultural difference across nations that might be related to attitudes and performance in learning. Second, using the intertemporal dimension of the new database for knowledge capital, longitudinal analysis of changes in growth rates eliminates stable country-specific factors in a general way in the spirit of country fixed effects. Third, focusing on U.S. labor-market outcomes for immigrants, a difference-in-differences approach deals not only with reverse causality but also with the possibility that cultural differences or economic institutions of national economies may be correlated with favorable educational outcomes. Finally, the chapter presents results of development accounting analysis that complement the growth regression analysis. Across all, the impact of knowledge capital is strong and consistent.
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