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Nonlinearities in Cross-Country Growth Regressions: A Bayesian Averaging of Thresholds (BAT) Approach

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We propose a framework for assessing the existence and quantifying the effect of threshold effects in cross-country growth regressions in the presence of model uncertainty. The method is based on Bayesian model averaging tech- niques and generalizes the Bayesian Averaging of Classical Estimates (BACE) method put forward by Sala-i-Martin, Doppelhofer, and Miller (2004). We ap- ply the method presented in this paper to a set of 21 variables that have been found to be robustly related to economic growth in a cross-section of 88 coun- tries. We find no evidence of robust threshold effects generated by the initial level of GDP per capita. However, we find that the proportion of years a country has been open to trade is an important source of nonlinear effects on economic growth.

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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0608.

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Date of creation: Sep 2006
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Handle: RePEc:vie:viennp:0608

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