Smooth ‘inverted-V-shaped’ & smooth ‘N-shaped’ pollution-income paths

We explore the idea of regime switching as a new methodological approach in the analysis of the emission-income relationship. A static smooth transition regression model is developed with fixed-effects. The basic idea is that when some threshold is passed, then the economy could move smoothly to another regime, with the emission-income relationship being different between the old and the new regime. We motive our methodology by proving that the quadratic or cubic polynomial model used in the literature derives from the smooth transition regression specification. The methodology is applied a panel dataset on US state-level sulfur dioxide and nitrogen oxide emissions covering 48 states over the period from 1929 to 1994. We find robust smooth N-shaped and smooth inverse-V-shaped pollution-income paths for the sulfur dioxide. For the nitrogen oxide emissions environmental pressure tends to rise with economic growth in the early stages of economic development then slows down but does not decline with further income growth.