Growth Economics and Reality
NBER Working Paper No. 8041
This paper questions current empirical practice in the study of growth. We argue that much of the modern empirical growth literature is based on assumptions concerning regressors, residuals, and parameters which are implausible both from the perspective of economic theory as well as from the perspective of the historical experiences of the countries under study. A number of these problems are argued to be forms of violations of an exchangeability assumption which underlies standard growth exercises. We show that relaxation of these implausible assumptions can be done by allowing for uncertainty in model specification. Model uncertainty consists of two types: theory uncertainty, which relates to which growth determinants should be included in a model, and heterogeneity uncertainty, which relates to which observations in a data set comprise draws from the same statistical model. We propose ways to account for both theory and heterogeneity uncertainty. Finally, using an explicit decision-theoretic framework, we describe how one can engage in policy-relevant empirical analysis.