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Transition Modeling and Econometric Convergence Tests

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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File URL: http://cowles.econ.yale.edu/P/cd/d15b/d1595.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1595.

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Length: 75 pages
Date of creation: Jan 2007
Date of revision:
Publication status: Published in Econometrica (2007), 75(6): 1771-1855
Handle: RePEc:cwl:cwldpp:1595
Note: CFP 1216.
Contact details of provider: Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/

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