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Models for Converging Economies

The aim of this article is the development of models for converging economies. After discussing models of balanced growth, univariate models of the gap between per capital income in two economies are examined. The preferred models combine unobserved components with an error correction mechanism and allow a decomposition into trend, cycle and convergence components. A new type of second-order error correction mechanism is shown to be particularly useful in this respect. The levels of per capita income in two economies may be modelled jointly by bivariate convergence models. These models generalise balanced growth models and can be based on autoregressive or unobserved components formulations. Both approaches provide coherent forecasts but the unobserved components models also yield a description of trends, cycles and convergence components. The methods are applied to data on the US and Japan. The generalisation to multivariate series is then set out.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/wp0216.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0216.

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Length: 33
Date of creation: May 2002
Date of revision:
Handle: RePEc:cam:camdae:0216
Note: EM
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Nyblom, Jukka & Harvey, Andrew, 1999. "Tests of Common Stochastic Trends," Cambridge Working Papers in Economics 9902, Faculty of Economics, University of Cambridge.
  2. Stock, James H., 1991. "Confidence intervals for the largest autoregressive root in U.S. macroeconomic time series," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 435-459, December.
  3. O'Connell, Paul G. J., 1998. "The overvaluation of purchasing power parity," Journal of International Economics, Elsevier, vol. 44(1), pages 1-19, February.
  4. Bart Hobijn & Philip Hans Franses, 2000. "Asymptotically perfect and relative convergence of productivity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 59-81.
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