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What do cross-sectional growth regressions tell us about convergence?

  • Daniel G. Swaine
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    This paper tests the dynamic implications of beta-convergence with time-series data from 48 contiguous U.S. states. The motivation for this paper rests with the interpretation of results from cross-sectional growth regressions. These results show that poor regions experience faster per-capita income growth than rich regions. This is interpreted as evidence of convergence. However, convergence is a dynamic adjustment process with testable implications in time-series data, while the literature employs cross-sectional data to estimate this dynamic concept. A set of strong assumptions must be made to jump from this cross-sectional correlation to its interpretation as a speed of convergence. We find that the time-series properties of the data appear to be inconsistent with beta-convergence dynamics. Further, our analysis rejects the assumptions necessary to interpret the cross-sectional correlation as a speed of convergence. Therefore, our results call into questions the interpretation that has been placed on this important cross-sectional finding.

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    File URL: http://www.bostonfed.org/economic/wp/wp1998/wp98_4.htm
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    Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 98-4.

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    Date of creation: 1998
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    Handle: RePEc:fip:fedbwp:98-4
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    1. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
    2. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
    3. Robert J. Barro & N. Gregory Mankiw & Xavier Sala-i-Martin, 1994. "Capital mobility in Neoclassical models of growth," Economics Working Papers 82, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Barro, R.J. & Sala-I-Martin, X., 1991. "Convergence Across States and Regions," Papers 629, Yale - Economic Growth Center.
    5. Barro, Robert J, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 407-43, May.
    6. Sala-i-Martin, Xavier, 1994. "Regional Cohesion: Evidence and Theories of Regional Growth and Convergence," CEPR Discussion Papers 1075, C.E.P.R. Discussion Papers.
    7. Sahling, Leonard G & Smith, Sharon P, 1983. "Regional Wage Differentials: Has the South Risen Again?," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 131-35, February.
    8. Zsolt Becsi, 1996. "Do state and local taxes affect relative state growth?," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 18-36.
    9. Dowrick, Steve & Quiggin, John, 1997. "True Measures of GDP and Convergence," American Economic Review, American Economic Association, vol. 87(1), pages 41-64, March.
    10. Baumol, William J, 1986. "Productivity Growth, Convergence, and Welfare: What the Long-run Data Show," American Economic Review, American Economic Association, vol. 76(5), pages 1072-85, December.
    11. Bernard, Andrew B & Jones, Charles I, 1996. "Productivity across Industries and Countries: Time Series Theory and Evidence," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 135-46, February.
    12. Wolff, Edward N, 1991. "Capital Formation and Productivity Convergence over the Long Term," American Economic Review, American Economic Association, vol. 81(3), pages 565-79, June.
    13. William T. Dickens & Lawrence F. Katz, 1987. "Inter-Industry Wage Differences and Theories of Wage Determination," NBER Working Papers 2271, National Bureau of Economic Research, Inc.
    14. Abramovitz, Moses, 1986. "Catching Up, Forging Ahead, and Falling Behind," The Journal of Economic History, Cambridge University Press, vol. 46(02), pages 385-406, June.
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