Nonlinearities in Growth: From Evidence to Policy

This paper considers the question of how one can translate evidence of nonlinearities and threshold effects in growth into policy recommendations. We argue that the current evidence of these effects, while important in terms of scholarly debates, does not readily lend itself to policy evaluation. The reasons for this are two-fold. First, the existing evidence on nonlinearities is relatively difficult to integrate into a common coherent view. Different models of nonlinearity appear in different papers; these models are often nonnested and do not present a clear alternative to linear growth models. Second, we argue that the econometric evidence of nonlinearities is often developed in ways that do not allow one to explicitly examine the effects of alternative policies on growth. We describe some recent econometric methods that can address these problems