The Herzer et al. (2014) comment on our article (Lof et al., 2014) addresses two issues. First, they propose various ways to circumvent our concerns regarding data handling in a paper by Nowak-Lehmann et al. (2012). We point out that under these new approaches the link between the empirical model and theoretical specification no longer holds. Moreover, the issue of reverse causality is not tackled by Herzer et al. (2014). Second, Herzer et al. (2014) criticize our empirical strategy and Panel VAR results. We show their remarks are based on misunderstandings and were, for the most part, already addressed in Lof et al. (2014).
Lof, M., Mekasha, T. J., & Tarp, F. (2015). Rejoinder to Herzer, Nowak-Lehmann, Dreher, Klasen, and Martinez-Zarzoso (2014). World Development, 70, 397–399. https://doi.org/10.1016/j.worlddev.2014.08.008