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Transition Modeling and Econometric Convergence Tests

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Author Info
Peter C.B. Phillips () (Cowles Foundation, Yale University)
Donggyu Sul (University of Auckland)

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Abstract

A new panel data model is proposed to represent the behavior of economies in transition allowing for a wide range of possible time paths and individual heterogeneity. The model has both common and individual specific components and is formulated as a nonlinear time varying factor model. When applied to a micro panel, the decomposition provides flexibility in idiosyncratic behavior over time and across section, while retaining some commonality across the panel by means of an unknown common growth component. This commonality means that when the heterogeneous time varying idiosyncratic components converge over time to a constant, a form of panel convergence holds, analogous to the concept of conditional sigma convergence. The paper provides a framework of asymptotic representations for the factor components which enables the development of econometric procedures of estimation and testing. In particular, a simple regression based convergence test is developed, whose asymptotic properties are analyzed under both null and local alternatives, and a new method of clustering panels into club convergence groups is constructed. These econometric methods are applied to analyze convergence in cost of living indices among 19 US. metropolitan cities.

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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1595.

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Length: 75 pages
Date of creation: Jan 2007
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Publication status: Published in Econometrica (2007), 75(6): 1771-1855
Handle: RePEc:cwl:cwldpp:1595

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Related research
Keywords: Club convergence Relative convergence Common factor Convergence log t regression test Panel data Transition

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Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Panos Fousekis, 2008. "Price Convergence in the EU Poultry and Eggs Markets," Economics Bulletin, Economics Bulletin, vol. 3(18), pages 1-11. [Downloadable!]
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