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Some Econometric Issues In Convergence Regressions

  • A. Di Liberto

    ()

  • J. Symons

Despite the abundance of different econometric techniques introduced in the empirical literature on convergence, it is usually assumed that shocks are uncorrelated across countries. This is surely unlikely for most of the datasets considered and we investigate a possibility so far ignored, namely the annual panel estimator where shocks are allowed to be correlated across countries. Our analysis is restricted to the case of more time periods than countries (T>N) which allows us to estimate by Maximum Likelihood with an unrestricted variance-covariance matrix of cross-country shocks. The paper examines by Monte Carlo robustness against certain possible mis-specifications, namely measurement error and heterogeneity of the convergence coefficients. Our analysis indicates that ML estimators are robust to plausible measurement error and variation of convergence rates across countries and are more efficient than conventional estimators for plausible values of cross-country error correlation. We consider in detail the relationship between the distribution of the ML estimator and the initial conditions. Applying our findings to a panel of OECD countries for the post-war period, we show that ML is effectively unbiased and more efficient than or conventional panel estimators OLS on a cross-section of countries. We argue the reason this estimators is so well behaved is that many OECD countries were far from their equilibrium values at the beginning of the period.

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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 199904.

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Date of creation: 1999
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Handle: RePEc:cns:cnscwp:199904
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  1. Donald Robertson & James Symons, 1991. "Some Strange Properties of Panel Data Estimators," CEP Discussion Papers dp0044, Centre for Economic Performance, LSE.
  2. Durlauf,S.N. & Quah,D.T., 1998. "The new empirics of economic growth," Working papers 3, Wisconsin Madison - Social Systems.
  3. Malcolm Knight & Norman Loayza & Delano Villanueva, 1993. "Testing the Neoclassical Theory of Economic Growth: A Panel Data Approach," IMF Staff Papers, Palgrave Macmillan, vol. 40(3), pages 512-541, September.
  4. Grubb, David & Symons, James, 1987. "Bias in Regressions With a Lagged Dependent Variable," Econometric Theory, Cambridge University Press, vol. 3(03), pages 371-386, June.
  5. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  6. Etsuro Shioji, 1997. "It's still 2%: evidence on convergence from 116 years of the US States panel data," Economics Working Papers 236, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Kevin Lee & M. Hashem Pesaran & Ron Smith, 1996. "Growth and Convergence in a Multi-Country Empirical Stochastic Solow Model," Working Papers 9637, Economic Research Forum, revised Dec 1996.
  8. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  9. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  10. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November.
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