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Are any growth theories linear? Why we should care about what the evidence tells us

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Author Info
Henderson, Daniel J.
Papageorgiou, Chris
Parmeter, Christopher F.

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Abstract

Recent research on macroeconomic growth has been focused on resolving several key issues, two of which, specification uncertainty of the growth process and variable uncertainty, have received much attention in the recent literature. The standard procedure has been to assume a linear growth process and then to proceed with investigating the relevant variables that determine growth across countries. However, a more appropriate approach would be to recognize that a misspecified model may lead one to conclude that a variable is relevant when in fact it is not. This paper takes a step in this direction by considering conditional variable uncertainty with full blown specification uncertainty. We use recently developed nonparametric model selection techniques to deal with nonlinearities and competing growth theories. We show how one can interpret our results and use them to motivate more intriguing specifications within the traditional studies that use Bayesian Model Averaging or other model selection criteria. We find that the inclusion of nonlinearities is necessary for determining the empirically relevant variables that dictate growth and that nonlinearities are especially important in uncovering key mechanism of the growth process.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8767.

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Date of creation: 13 May 2008
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Handle: RePEc:pra:mprapa:8767

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Related research
Keywords: Growth Nonlinearities Irrelevant Variables Least Squares Cross Validation Bayesian Model Averaging Parameter Heterogeneity

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Find related papers by JEL classification:
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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