Model Evaluation and Causality Testing in Short Panels: The Case of Infrastructure Provision and Population Growth in the Brazilian Amazon

In this paper we examine the relationship between infrastructure growth and population growth in the Amazon using a panel of 293 municipalities over the period from 1975 to 1985. Contemporaneous cross‐section analysis confirms a strong positive correlation between infrastructure and urban population but does not indicate direction of causality. Thus, we employ a modified form of the traditional Granger causality tests to suit the short time series that we have available. Based on out‐of‐sample forecasting tests we conclude that the empirical evidence supports the hypothesis that growing urban populations lead to more infrastructure development, rather than vice versa.