Bayesian Fixed-Effects Panel Kink Regression with Unknown Threshold with Application to the Impact of Economic Freedom on Economic Growth

This paper employs a fixed-effects Bayesian panel kink regression framework to examine the dynamics of the impact of economic freedom on economic growth in five selected Sub-Saharan African countries. Our novel findings have empirically established that economic freedom has a nonlinear impact on economic growth with a kink point value of approximately 59%. The results show that economic freedom positively impacts economic growth in the lower region, but negatively in the higher region. Specifically, with a 95% posterior probability, a 1% point rise in the total economic freedom score will lead to about 0.14% point increase in economic growth in the lower region, whilst it will be about 0.31% point decline in growth in the higher regime with a 95% posterior probability, ceteris paribus. This finding starkly highlights the fact that, in addition to the nonlinearity of the impact of economic freedom on growth, the impact in the high region is more than twice larger than it is in the lower region. This finding is very relevant for policy choices and implementations that focus on economic freedom and economic growth.