To estime an investissement shock on economic growth, should we add all the explanatory growth control variables or can we limit ourselves to a two-variable model where economic growth is the variable to be explained and investment is the explanatory variable?
I would include a reasonable set of lags of the investment variable and the dependent variable. The latter to check for persistence in growth. The former to allow for time to elapse between an increase in investment and it feeding through into economic growth as it takes time to buy new machinery (or capital stock etc) and get it running up to full speed and efficiency.
I was wondering about the model to be estimated. should it include other explanatory variables for growth, in particular inflation, the opening rate, etc. or can I limit myself to two growth investment variables?
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