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Aggregation versus Heterogeneity in Cross-Country Growth Empirics

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  • Markus Eberhardt
  • Francis Teal

Abstract

The cross-country growth literature commonly uses aggregate economy datasets such as the Penn World Table (PWT) to estimate homogeneous production function or convergence regression models. Against the background of a dual economy framework this paper investigates the potential bias arising when aggregate economy data instead of sectoral data is adopted in macro production function regressions. Using a unique World Bank dataset we estimate production functions in agriculture and manufacturing for a panel of 41 developing and developed countries (1963-1992). We employ novel empirical methods which can accommodate technology heterogeneity, variable nonstationarity and the breakdown of the standard cross-section independence assumption. We then investigate the potential for biased estimates due to aggregation and empirical misspecification, relying on both theory and Monte Carlo simulations. We confirm substantial bias in the technology coefficients using data for a stylised aggregate economy made up of agricultural and manufacturing sectors and a matched PWT dataset.

Suggested Citation

  • Markus Eberhardt & Francis Teal, 2010. "Aggregation versus Heterogeneity in Cross-Country Growth Empirics," CSAE Working Paper Series 2010-32, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2010-32
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    1. Daniel Goya, 2014. "The Multiple Impacts of the Exchange Rate on Export Diversification," Cambridge Working Papers in Economics 1436, Faculty of Economics, University of Cambridge.

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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