Convergence Hypotheses are Ill-Posed:Non-stationarity of Cross-Country Income Distribution D
The recent literature on Ã¢â‚¬Å“convergenceÃ¢â‚¬? of cross-country per capita incomes has been dominated by two competing hypotheses: Ã¢â‚¬Å“global convergenceÃ¢â‚¬? and Ã¢â‚¬Å“club-convergenceÃ¢â‚¬?. This debate has recently relied on the study of limiting distributions of estimated income distribution dynamics. Utilizing new measures of Ã¢â‚¬Å“stochastic stabilityÃ¢â‚¬?, we establish two stylized facts that question the fruitfulness of the literatureÃ¢â‚¬â„¢s focus on asymptotic income distributions. The first stylized fact is non-stationarity of transition dynamics, in the sense of changing transition kernels, which renders all Ã¢â‚¬Å“convergenceÃ¢â‚¬? hypotheses that make long-term predictions on income distribution, based on relatively short time series, less meaningful. The second stylized fact is the periodic emergence, disappearance, and re-emergence of a Ã¢â‚¬Å“stochastically stableÃ¢â‚¬? middle-income group. We show that the probability of escaping a low-income poverty-trap depends on the existence of such a stable middle income group. While this does not answer the perennial questions about long-term effects of globalization on the cross-country income distribution, it does shed some light on the types of environments that are conducive to narrowing/
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