I want to estimate the effect of investment and other economic variables on "growth" (the dependent variable) through the Fully Modified Ordinary Least Squares (FMOLS) method (I have a panel data set of six countries and 19 year periods). Should GDP be added as an independent variable? (all variables are I(1) and are cointegrated). I appreciate very much your help.
Economic growth if not proxy by the GDP growth rate is computed using GDP growth rate. I therefore don't think that it is right including GDP as one of your independent variables in a model where the dependent variable is economic growth.
Thank you very much for your contributions, dear Sophia and Nathaniel. They are very valuable for me ;)
But the growth rate can be affected by the level, if there is convergence for example.
I think it is better to put GDP as dependent variable to measuring economic growth. The problem of co integration you have , is due to reason that you used GDP as explanatory variable.
I suggest to rebuild your model again and to specify dependent and independents variables clearly.
Yes, I agree with the fact that GDP should not come in as an explanatory variable in your growth model.
Usualy economic growth is reflected/measured by GDP. If you find another substitute for economic growth instead of GDP, it is possible to consider GDP as an explanatory variable. For Instance, human development(HD) is a function of GDP per capita, life expectancy and education level.
Economic growth is the change variable whereas GDP is the level variable; therefore, their co-integration is a tricky one. On the other side, level variable as an independent variable and its growth as a dependent variable is not justified in logical ground. Therefore, please remove the level GDP as an independent variable.
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