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Income Convergence: The Dickey-Fuller Test under the Simultaneous Presence of Stochastic and Deterministic Trends

  • Manuel Gomez

    ()

    (Department of Economics and Finance, Universidad de Guanajuato)

  • Daniel Ventosa-Santaularia

    ()

    (Department of Economics and Finance, Universidad de Guanajuato)

We investigate the efficiency of the Dickey-Fuller (DF) test as a tool to examine the convergence hypothesis. In doing so, we first describe two possible outcomes, overlooked in previous studies, namely Loose Catching-up and Loose Lagging-behind. Results suggest that this test is useful when the intention is to discriminate between a unit root process and a trend stationary process, though unreliable when used to differentiate between a unit root process and a process with both deterministic and stochastic trends. This issue may explain the lack of support for the convergence hypothesis in the aforementioned literature.

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Paper provided by Universidad de Guanajuato, Department of Economics and Finance in its series Department of Economics and Finance Working Papers with number EM200703.

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Length: 8 pages
Date of creation: Mar 2007
Date of revision:
Publication status: Published in Brazilian Review of Econometrics (forthcoming)
Handle: RePEc:gua:wpaper:em200703
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  1. repec:ebl:ecbull:v:6:y:2005:i:13:p:1-20 is not listed on IDEAS
  2. Loewy, Michael B. & Papell, David H., 1996. "Are U.S. regional incomes converging? Some further evidence," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 587-598, December.
  3. Bernard, A.B. & Durlauf, S.N., 1994. "Interpreting Tests of the Convergence Hypothesis," Working papers 9401r, Wisconsin Madison - Social Systems.
  4. Carlino, Gerald A. & Mills, Leonard O., 1993. "Are U.S. regional incomes converging? : A time series analysis," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 335-346, November.
  5. Peter C.B. Phillips, 1985. "Understanding Spurious Regressions in Econometrics," Cowles Foundation Discussion Papers 757, Cowles Foundation for Research in Economics, Yale University.
  6. Kian-Ping Lim & M. Azali & Hock-Ann Lee, 2005. "Income Disparity between Japan and ASEAN-5 Economies: Converge, Catching Up or Diverge?," Economics Bulletin, AccessEcon, vol. 6(13), pages 1-20.
  7. Peter C.B. Phillips & Steven N. Durlauf, 1985. "Multiple Time Series Regression with Integrated Processes," Cowles Foundation Discussion Papers 768, Cowles Foundation for Research in Economics, Yale University.
  8. Oxley, Les & Greasley, David, 1995. "A Time-Series Perspective on Convergence: Australia, UK and USA since 1870," The Economic Record, The Economic Society of Australia, vol. 71(214), pages 259-70, September.
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