Income Convergence: The Dickey-Fuller Test under the Simultaneous Presence of Stochastic and Deterministic Trends
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.
|Date of creation:||Mar 2007|
|Publication status:||Published in Brazilian Review of Econometrics (forthcoming)|
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