Trade as a threshold variable for multiple regimes

This paper employs the data-sorting method developed by Hansen [Econometrica 68 (2000) 575] which allows the data to endogenously select regimes using different variables. It is shown that openness, as measured by the trade share to GDP, is a threshold variable that can cluster middle-income countries into two distinct regimes that obey different statistical models. Our result suggests that openness may not be as crucial in the growth process of low and high-income countries but it is instrumental in identifying middle-income countries into high and low-growth groups.