Nonlinearities in cross-country growth regressions: A Bayesian Averaging of Thresholds (BAT) approach

Abstract

We propose a Bayesian Averaging of Thresholds (BAT) approach for assessing the existence and quantifying the effect of threshold effects in cross-country growth regressions in the presence of model uncertainty. The BAT method extends the Bayesian Averaging of Classical Estimates (BACE) approach proposed by Sala-i-Martin et al. (2004) by allowing for uncertainty over nonlinear threshold effects. We apply our method to a set of determinants of long-term economic growth in a cross-section of 88 countries. Our results suggest that when model uncertainty is taken into account there is no evidence for robust threshold effects caused by the Initial Income, measured by GDP per capita in 1960, but that the Number of Years an Economy Has Been Open is an important source of nonlinear effects on growth.