Non-linear Panels in Economics and Finance

Abstract

This thesis firstly examines the Purchasing Power Parity (PPP). Secondly, it investigates the impact of military expenditure, healthcare expenditure, trade openness and political instability on economic growth. Finally, this thesis diagnoses the relationship between financial development and economic growth. The second chapter examines Purchasing Power Parity (PPP) in a set of developed and developing countries. The chapter specifically examines whether PPP holds when applying linear and nonlinear methods in order to determine whether the nonlinearity of real exchange rate is the cause of exchange rates’ inability to reject the null of unit root even when it is false. The results indicate that PPP holds in developed countries using linear methods. However, for developing countries, the results show that the behaviour of real exchange rates is nonlinear. The third chapter examines the impact of the military expenditure, healthcare expenditure, trade openness and political instability on economic growth in NATO countries by applying System GMM and the dynamic panel threshold model, which allows for the non-linear threshold effect with endogenous regressors as well as threshold variables. The results from GMM indicate that there is a negative relationship between military expenditure and economic growth and a positive relationship between healthcare expenditure and economic growth as well as a positive relationship between trade openness and economic growth. Finally, there is no statistical relationship between political instability and economic growth. Furthermore, the nonlinear approach indicates that when healthcare spending and trade openness serve as threshold variables, the impact of military spending on economic growth is positive and significant. The last chapter in this thesis examines the relationship between financial development and economic growth by applying the Panel-GARCH method. Two indicators for financial development are used as a proxy for financial development in investigating this relationship between financial development and economic growth. The results suggest that there is a positive and statistically significant relationship between financial development and economic growth uncertainty.