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(Fractional) Beta Convergence

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  • Claudio Michelacci

    ()
    (CEMFI)

  • Paolo Zaffaroni

    ()
    (Bank of Italy, Research Department)

Abstract

Unit roots in output, an exponential 2 per cent rate of convergence and no change in the underlying dynamics of output seem to be three stylized facts that cannot go together. This paper extends the Solow-Swan growth model allowing for cross-sectional heterogeneity. In this framework, aggregate shocks might vanish at a hyperbolic rather than at an exponential rate. This implies that the level of output can exhibit long memory and that standard tests fail to reject the null of a unit root despite mean reversion. Exploiting secular time series properties GDP, we conclude that traditional approaches to test for uniform (conditional and unconditional) convergence suit first step approximation. We show both theoretically and empirically how the uniform 2 per cent rate of convergence repeatedly found in the empirical literature is the outcome of an underlying parameter of fractional integration strictly between 1/2 and 1. This is consistent with both time series and cross-sectional evidence recently produced.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 383.

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Date of creation: Oct 2000
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Handle: RePEc:bdi:wptemi:td_383_00

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Web page: http://www.bancaditalia.it
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Keywords: growth model; convergence; long memory; aggregation;

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References

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  1. Bernard, A.B. & Durlauf, S.N., 1993. "Convergence in International Output," Working papers 93-7, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Barro, R.J. & Sala-I-Martin, X., 1991. "Convergence Across States and Regions," Papers 629, Yale - Economic Growth Center.
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  18. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  19. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
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  21. den Haan, Wouter J., 1995. "Convergence in stochastic growth models The importance of understanding why income levels differ," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 65-82, February.
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