A Study on the Non-Linearity Hypothesis between Various Macroeconomic Variables and Economic Growth in Developing Countries

This thesis comprises three empirical chapters on the non-linear relationship between different macroeconomic variables and economic growth and employs new developed econometrics techniques. After a short introductory chapter, the second chapter investigates the relationship between inflation and economic growth for 35 countries in the Middle Eastern and Sub-Sahara African countries between 1986 and 2011. We have employed a Panel Smooth Transition Regression (PSTR) approach to estimate a precise threshold level of inflation. We consider, also, the impact of inflation threshold levels between the finance-growth nexus. Additionally we explore whether or not the relationship between inflation and economic growth varies according to the level of institutional quality. The results indicate that, indeed, the inflation-growth nexus relies on the level of inflation. Moreover we confirm the importance of institutional quality level in determining the relationship between inflation and economic growth. Further, we find that the finance-growth nexus varies according to the threshold level of inflation. The third chapter introduces a new estimation approach to the PSTR model; it is defined in the form of State Space system equations. We developed this approach to estimate two different threshold variables simultaneously and to consider the existence of a static and stochastic transition function. We employed this panel econometric investigation to identify the non-linear relationship between government size and economic growth for 5 countries in the Middle East and North Africa (MENA) region, during the period from 1970 to 2014. This chapter’s main finding asserts the existence of a threshold level of government size below which it hurts economic growth. The fourth chapter develops the employed model in the third chapter to provide a new insight into the relationship between foreign aid and economic growth. We developed this model in order to consider the time varying effects of the explanatory variables and to examine further the multiple regime threshold models. In this chapter we study the role of income in determining the non-linear relationship between foreign aid and economic growth for 25 developing countries during the period from 1984 to 2008. Additionally, we detect whether or not corruption levels matter for the effectiveness of aid in the aid recipient countries. Generally, based on their income levels, we recognize various threshold levels of foreign aid for each group of developing countries.