Robust determinants of growth in Asian developing economies: A Bayesian panel data model averaging approach

- We use a simultaneous equations model with dynamics in a panel data framework to examine the model uncertainty over the set of control variables.
- Our empirical evidence on the determinants of growth suggests that an economy's investment ratio is positively correlated to growth, whereas government consumption expenditure and terms of trade are negatively correlated.
- We also find the evidence of nonlinear correlation between inflation and economic growth, that is, inflation impedes economic growth when it exceeds 5.43% but does not have any significant effect on growth below that level.

This paper investigates the determinants of growth in the Asian developing economies. We use Bayesian model averaging (BMA) in the context of a dynamic panel data growth regression to overcome the uncertainty over the choice of control variables. In addition, we use a Bayesian algorithm to analyze a large number of competing models. Among the explanatory variables, we include a nonlinear function of inflation that allows for threshold effects. We use an unbalanced panel data set of 27 Asian developing countries over the period 1980-2009. Our empirical evidence on the determinants of growth suggests that an economy's investment ratio is positively correlated to growth, whereas government consumption expenditure and terms of trade are negatively correlated. We also find evidence of a nonlinear relationship between inflation and economic growth, that is, inflation impedes economic growth when it exceeds 5.43% but does not have any significant effect on growth below that level.