Smooth Transition Regression Research Articles

Exchange rate pass‐through to consumer prices in India – nonlinear evidence from a smooth transition model

AbstractUsing a backward‐looking Philips curve framework and a Logistic Smooth Transition Regression (STR) model, this article examined the exchange rate pass‐through (ERPT) to final consumer prices in the case of India. Specifically, the nonlinearity of ERPT has been investigated with respect to the level of economic activity and the rate of inflation by considering two alternative measures of exchange rate. For the first transition variable, results are markedly different between high and low‐activity regimes and signify the favourable impact of economic activity on the extent of pass‐through. In the short run, 1% exchange rate appreciation would decrease the price level by 0.244% when the economy is in a low‐activity regime; however, the same appreciation increases the price level by 0.485% when there is a boom in the economy. In the long run, ERPT in the low‐activity regime is −0.358, and in the high‐activity regime, it is 0.039. In both regimes, pass‐through coefficients differ from zero and one, implying that neither local currency pricing nor producer currency pricing characterizes the ERPT mechanism. The impact of other important determinants of inflation is also well according to theoretical expectations. Finally, for the rate of inflation, we did not report any evidence favouring the Taylor hypothesis in the case of India.

Non-linear Threshold Effect of Governance Quality on Economic Growth in African Countries: Evidence from Panel Smooth Transition Regression Approach

Non-linear Threshold Effect of Governance Quality on Economic Growth in African Countries: Evidence from Panel Smooth Transition Regression Approach

Nonlinear Impact of Inflation on Economic Growth in Nepal: A Smooth Transition Regression Approach

Macroeconomic stability is one of the most important macroeconomic goals for all countries. In recent years, the Nepalese economy has been experiencing inflation twice the economic growth rate, posing a threat to macroeconomic stability. Thus, careful investigation of the relationship between inflation and economic growth is required. This study assesses the existence of a nonlinear relationship between inflation and economic growth in the Nepalese context. The assessment is performed by considering the possibility of smoothly changing slope parameters to maximise economic growth or minimise growth losses and to determine the optimal inflation level along with the speed of inflation response to economic growth. The study applies a Logistic Smooth Transition Regression model that Terasvirta (1998, 2004) developed to estimate an optimal inflation rate using annual time-series data from 1976 to 2019. The study finds a nonlinear relationship between inflation and economic growth and estimates an optimal inflation threshold of 6.38±1.36 per cent for the Nepalese economy. It also shows that inflation positively correlates with economic growth up to the threshold level and that the association becomes negative beyond that level. This study suggests that inflation beyond the threshold level harms economic growth, while inflation below has a favourable effect. The findings assist policymakers in making an informed decision, providing leverage in inflation control and creating an atmosphere encouraging economic growth.

Artificial intelligence and unemployment:An international evidence

This paper examines the possible effect of artificial intelligence (AI) on unemployment using a broad database of AI-related patents in 40 developed and developing markets from 2000 to 2019. The study employs a panel smooth transition regression (PSTR) model to analyse the relationship between artificial intelligence and unemployment under various inflation levels. The study contributes to the existing literature with several findings. First, results from our analysis confirm the non-linear relationship between artificial intelligence and unemployment depending on the threshold of inflation. In general, artificial intelligence increases unemployment until a certain inflation threshold is attained, and then the effect reduces afterwards. Second, the smooth mechanism employed in this analysis can capture individual estimates varying amongst countries over time.

Assessing the Threshold Level of Ownership Structure and its Relationship with Tax Avoidance in Security Market: A Nonlinear Smooth Transition Regression Approach

Assessing the Threshold Level of Ownership Structure and its Relationship with Tax Avoidance in Security Market: A Nonlinear Smooth Transition Regression Approach

External debt and economic growth in Sub-Saharan Africa: does heterogeneity in the quality of public sector management make a difference?

This study empirically examines the effect of external debt on economic growth, taking into account heterogeneity in public sector management (PSM) across 31 selected sub-Sahara African (SSA) countries spanning 2005 to 2017. In this study, we contributed to existing studies by examining how differences in PSM quality complement external debt to influence economic growth. We employ the system-generalized method of moment (system-GMM) and the panel smooth transition regression (PSTR) methods for the analysis. The results without differences in PSM quality show that external debt has a significant negative effect on economic growth in SSA. However, the effect of external debt on economic growth tends to be positive for SSA countries with strong PSM quality when external debt interacts with PSM quality. Furthermore, the results show that countries with strong PSM quality experienced higher economic growth than those with weak PSM quality. The PSTR also showed strong evidence of a nonlinear relationship between external debt and economic growth and estimated the indebtedness threshold value at 45% for the selected SSA countries. The implication of the findings calls for governments in SSA to strengthen the quality of public sector management via structural reforms aimed at public sector reform, tax reforms and strengthening debt management capacity to ensure positive growth effects of external debt.

Regional differences and threshold effect of clean technology innovation on industrial green total factor productivity

Guiding technological progress towards clean innovations is crucial to industrial green transformation. This paper explains how clean technology innovation affects industrial green total factor productivity, using Tobit and panel smooth transition regression (PSTR) models to empirically test the relationship between clean technology innovation and industrial green total factor productivity. This research shows that clean technology innovation has a significantly positive effect on industrial green total factor productivity. The magnitude of this effect is different in various regions. When the intensity of environmental regulation reaches a particular threshold value in the central and western regions, clean technology innovation can significantly promote industrial green total factor productivity. In the eastern region, however, strict environmental regulation inhibits the promotion effect of clean technology innovation on industrial green total factor productivity. The corresponding research conclusion provide theoretical support and empirical evidence for exploring the way of industrial green transformation.

Threshold effects of board gender diversity on firm performance: panel smooth transition regression model

PurposeThis study aims to investigate whether threshold effects exist in the relationship between board gender diversity and firm performance.Design/methodology/approachThis study applies the panel smooth threshold regression model (PSTR) to a sample of 284 non-financial French firms listed on Euronext Paris over the period 2009–2017. Firm performance proxies are Tobin’s Q and return on assets (ROA). The board gender diversity is measured by the percentage of women participation in board.FindingsThreshold effects in the relationships between board gender diversity and firm performance measures are found. For Tobin’s Q, the model has one threshold at the 34.17% of women directors’ appointment on boards. Similarly, for ROA, the model has one threshold at the 38.28% of women presence in the board. The results show that above the estimated threshold, women directorship has a positive impact on firm performance. However, below the threshold, there is a neutral relationship. The findings support the critical mass view that a minimum of one third women representation in board is compulsory to achieve the desired effect of gender diversity.Practical implicationsThis study’s finding provides useful insights to managers, investors and policymakers. Managers and investors can identify the adequate board gender diversity levels that enhance firm performance. Policymakers are divided on whether mandatory or voluntary board gender quota should be adopted. This study suggests that a quota of one third can be used in policy implementation.Originality/valueUnlike prior studies that consider the relationship between firm performance and board gender diversity as linear, to the best of the authors’ knowledge, this study is the first to investigate the threshold effects in this relationship using a new econometric approach.

Green Total Factor Productivity Growth: Policy-Guided or Market-Driven?

The green growth mode of modern economy is affected by both policy and market, but previous studies have lacked a comparison between the two effects on green economy development. Which is the leading factor of green growth: policy or market? Using the Panel Smooth Transition Regression (PSTR) model and the twelve-year data of more than 200 prefecture-level cities in China, we compared and analyzed the linear and non-linear effects of environmental regulation and marketization degree on green total factor productivity (GTFP). The results show that: (1) both environmental regulation and marketization degree have a non-linear promoting effect on GTFP. (2) GTFP is mainly market-driven rather than policy-guided. (3) Environmental regulation and marketization promote the improvement of GTFP through the industrial upgrading effect and the innovation development effect, respectively. This paper makes up for the comparative analysis gap of factors in the field of green growth and extends from the single determination of influencing factors to the importance of the comparison of influencing factors with the transition perspective. The conclusions provide a reference for the green development of countries and regions, emphasizing the importance of green development policies adapting to local conditions and time and providing evidence for market-oriented green economy development.

The non-linear effects of fixed broadband on economic growth in Africa

PurposeThe study assesses the non-linear nexus between fixed broadband and economic growth. The study focuses on data from 33 African countries for the period 2010 to 2020.Design/methodology/approachThe empirical evidence is based on unit root tests, panel smooth transition regression and the generalized method of moments.FindingsThe following findings are established in this study. (1) The proportion of the population with access to electricity above and below which the relationship between fixed broadband and economic growth changes in sign is about 60%. (2) Below this threshold, each 1% increase in fixed broadband subscriptions induces a decline in economic growth of about 2.58%. Above the threshold, economic growth would increase by 2.43% when fixed broadband subscriptions increase by 1%. Sensitivity analyses and generalized method of moments (GMM) estimation show that these results are robust.Practical implicationsDue to the coronavirus disease (COVID-19) pandemic, which requires countries to take adequate measures to curb the spread of the pandemic, especially by means of virtual economic activities, any national policy aiming at improving the access of populations to high levels of fixed broadband services should be preceded by the implementation of an electrification program for at least 60% of the total population. Otherwise, providing a good quality internet connection for the benefit of the population would not produce the expected effects on economic growth and would, therefore, be counterproductive.Originality/valueThis study complements the extant literature by providing thresholds at which fixed broadband affects economic growth.

Inbound tourism and income inequality: the role of banking sector development

This study empirically confirms the nonlinear effects of banking sector development on the inbound tourism–income inequality nexus by adopting the panel smooth transition regression model for 102 economies. Findings for the full sample suggest that although inbound tourism can reduce income inequality, this effect gradually weakens as the banking sector develops. In high-income economies, an increase in international tourism receipts first exacerbates and then decreases income inequality as the banking sector develops. Moreover, a well-developed banking sector could improve income distribution. In low-income economies, the international tourism receipts–inequality nexus differs from the international tourist arrivals–inequality nexus under various levels of banking sector development. International tourism receipts initially decrease income inequality and then increase it when the banking sector develops to a certain degree. However, international tourist arrivals first deteriorate income distribution and then improve it as the banking sector develops. From a policy perspective, appropriate policies should be implemented to achieve a balance between the banking sector, inbound tourism, and income inequality in high-income and low-income economies and ensure sustainable development.

Assessing the Delicate Balance Between Firms’ Digitalization and Environmental Performance

The current epidemic period has heightened the need of digital transformation. This shift has been viewed as a panacea in the past, with the argument that increased digitalization will result in improved environmental performance. However, as the digitization process progresses, we recognize that it may have some environmental consequences that must be considered. We investigate the complex relationship between home country digitization and business environmental performance in this regard. More specifically, we believe that, at first, home country digitalization has a positive impact on environmental performance (e.g., improved energy efficiency and resource management), but that it eventually reaches a tipping point where an excessive level of digitalization causes a “rebound effect”, resulting in increased resource use and pollution. For the period 2014-2019, our panel data of 5,015 enterprises from 47 countries in ten sectors verifies our projections. Furthermore, the panel smooth transition regression model (PSTR) reveals that the institutional framework level of countries has a moderating effect on the association between digital transformation and environmental performance. Our findings demonstrate that the negative effects of home country digitalization take a long time to manifest in nations with a better institutional structure.

Economic policy uncertainty, oil price volatility and stock market returns: Evidence from a nonlinear model

This paper investigates the nonlinear relationship between economic policy uncertainty, oil price volatility and stock market returns for 25 countries by applying the panel smooth transition regression model. We find that oil price volatility has a negative effect on stock returns, and this effect increases with economic policy uncertainty. Furthermore, there is pronounced heterogeneity in responses. First, oil-exporting countries whose economies depend more on oil prices respond more strongly to oil price volatility than oil-importing countries. Second, stock returns of developing countries are more susceptible to oil price volatility than that of developed countries. Third, crisis plays a crucial role in the relation between oil price volatility and stock returns.

Exploring Okun's law asymmetry: An endogenous threshold logistic smooth transition regression approach*

AbstractUsing a novel methodology, we offer new evidence that a threshold relationship exists for Okun's law (the well‐known output–unemployment co‐movement). We use a logistic smooth transition regression (LSTR) model where threshold endogeneity is addressed using copula transformations of the threshold variable. We also suggest a test of the linearity hypothesis against the LSTR model. In line with Okun's insight (and that of the subsequent literature) that the trade‐off can be affected by different margins, we consider several potential threshold variables. We find mainly a combination of structural and policy‐related variables accounts for changes in the Okun's law trade‐off for the United States in recent decades. This conclusion is bolstered by combing these threshold candidates into a single factor. Accordingly, we find that the unemployment gap is increasingly associated with a smaller output gap. Notably, while the Great Recession accelerated that rise, the bulk of the change occurred beforehand.

Does energy intensity matter in the nexus between energy consumption and economic growth regarding capital-energy substitution?

This article investigates how the non-linear connection between energy consumption and economic development is influenced by energy intensity level in the context of energy-capital substitution. We firstly analyze the substitutability/complementarity between energy and capital by estimating VES production function within the standard Solow growth model framework for 58 countries over the period of 1975-2017. The selected countries are classified into four groups according to their relative energy intensity levels and their accessibility to energy. The estimation findings reveal that energy and capital are complements in the final output for each country group. Hence, in this paper, as further analysis, the study examines whether or not energy consumption always fosters economic growth. We investigate the non-linear link between energy consumption and economic development by constructing a panel smooth transition regression (PSTR) model for each country group and looking at the impact of energy intensity in this relationship. The empirical results provide that for each country group, there is a threshold level for energy intensity. Regardless of whether a country is a net energy exporter or net energy importer, it needs to use energy efficiently and not exceed the ideal energy intensity level in both production and consumption to maintain long-term economic growth.

Exploring the Effects of Tourism Development on Air Pollution: Evidence from the Panel Smooth Transition Regression Model.

Based on the theoretical framework of the Environmental Kuznets Curve (EKC), this study investigates whether tourism development can decrease air pollution. This study applies the panel smooth transition regression approach and panel data for 2005–2019 from 283 prefecture-level cities in China to examine the nonlinear effect of tourism development on PM2.5, emissions. Our results reveal that the effects of tourism on PM2.5, emissions vary according to the modes of tourist arrivals. At the national level, the effect of tourism on PM2.5 emissions exhibits an inverted-U shape. At the regional level, tourism exerts a U-shaped impact on PM2.5 emissions in eastern China, and tourism is nonlinearly negatively associated with PM2.5 emissions in central and western China. An important theoretical contribution of our study is the proposal and validation of the U-shaped tourism-induced EKC hypothesis.

Corporate Social Responsibility and Firm Performance in GCC Countries: A Panel Smooth Transition Regression Model

There is evidence for mixed effects of corporate social responsibility (CSR) on corporate financial performance. In particular, evidence is reported to be positive, negative, and insignificant. These controversies are generally explained by two opposing schools of thought, which are the social impact hypothesis and the shift of focus hypothesis. This paper attempts to contribute to the ongoing debate by investigating whether the relationship between CSR and firm financial results is nonlinear. Therefore, this research relies on a panel smooth transition regression (PSTR) model in order to calculate the value transition threshold of CSR in 70 Gulf Cooperation Council (GCC) firms from 2015 to 2020, using the CSR composite index and various CSR dimensions, which include environmental, social, and governance transition dimensions. Empirical findings indicate that investment in CSR does not help to boost corporate value until it exceeds the value transition threshold. However, when the marginal benefit exceeds the cost, CSR investment becomes a positive contributor to corporate performance. Furthermore, results indicate that the nonlinear relationship persists when using the individual CSR dimensions, i.e., governmental, social, and environmental CSR measurements. Finally, an interesting finding shows that the social CSR dimension is associated with the highest threshold level. Hence, firms should invest more in the social aspects of CSR in order to see their profitability increase.

Does the level of renewable energy matter in the effect of economic growth on environmental pollution? New evidence from PSTR analysis.

This study investigates the relationship between environmental pollution and economic growth in the context of renewable energy in OECD countries using the panel smooth transition regression (PSTR) model for 1995-2018. The study finds the value of the threshold variable, calculated as the share of renewable energy use in total energy consumption, to be 7.825%. In this context, economic growth affects the environment negatively and increases environmental pollution when the share of renewable energy use in energy consumption is below the threshold. When this share is above the threshold, it reduces environmental pollution by affecting the environment positively. In addition, the findings reveal a non-linear inverted U-shaped relationship between the environment and economic growth in the context of renewable energy, and the Environmental Kuznets Curve (EKC) hypothesis is valid. Therefore, the widespread use of renewable energy is a solution to reducing environmental pollution. Accordingly, it is very important for policymakers to both highlight and encourage renewable energy use. Furthermore, countries need to both invest in this area and focus on R&D to increase renewable energy production.

Global value chains and exchange rate pass-through—The role of non-linearities

This paper examines the role of global value chains development in reducing the exchange rate pass-through (ERPT) to import and producer prices. In contrast to the existing research, we assume that the decline in ERPT resulting from the enhanced participation in GVC may be non-linear with respect to country’s position in the global value chain due to different firms’ market power at various stages of vertical specialization. We investigate a panel of 43 advanced and emerging market economies using a panel smooth transition regression model and WIOD data. We find that growing backward GVC participation of the suppliers of imported intermediate input results in a reduction of the ERPT to producer prices in the importing country. Moreover this effect is non-linear. The ERPT for countries whose suppliers are strongly involved in the production along the global value chains is significantly (four times) smaller than for economies with suppliers not participating in GVC. We also document that the decline in aggregate ERPT in recent years resulted mainly from changes occurring in ERPT for the EU member states due to increased backward GVC participation of their major trading partners, while the ERPT for other countries has in fact remained roughly unchanged throughout the analyzed period.

The growth effect of trade openness on African countries: Evidence from using an instrumental variable panel smooth transition model

AbstractThis paper assesses the relationship between trade openness and economic growth in Africa by accounting for the heterogeneity of African countries. In addition, the paper contributes to the literature on trade openness and economic growth nexus by applying the instrumental variable panel smooth transition regression, a methodology that accounts for nonlinearity and endogeneity in the relationship between the two variables. The results of the empirical analysis reveal that the investment ratio is a channel through which trade openness affects economic growth in the African continent. In addition, the relationship between trade openness and economic growth varies according to the degree of a country's development in Africa. The study finds a negative relationship between openness and growth in low‐income countries. Conversely, for upper‐income countries, the coefficients of trade indicators are positive and statistically significant. The results indicate that African countries are not homogeneous, especially concerning trade openness and economic growth nexus.