Several recent empirical studies use instrument variables (IV) estimation strategies in panel data to try to identify statistically the causes of violent conflict.
We explain how the long-recognized spurious regressions problem can lead to both bias and mistaken inference in panel IV studies given cycles in the time series component of the panel. We illustrate the problem by revisiting two recent, prominent studies that rely for identification on instruments exhibiting opposing cycles over time. The use of shift-share or other interacted instruments does not resolve the bias. When outcome variables are cointegrated with endogenous variables through policy preferences or some other mechanism, the bias can be in the same direction as the reverse causation the IV is meant to resolve.
We close by outlining seven practical diagnostic steps researchers can follow to reduce the prospect of spurious regressions confounding panel IV estimation.
