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A Pair-Wise Approach to Testing for Output and Growth Convergence

  • Pesaran, M. Hashem

    ()

    (University of Cambridge)

This paper proposes a pair-wise approach to testing for output convergence that considers all N(N-1)/2 possible pairs of log per capita output gaps across N economies. A general probabilistic definition of output convergence is also proposed, which suggests that all such output gap pairs must be stationary with a constant mean. The approach is compatible with individual output series having unit roots, does not involve the choice of a reference country in computation of output gaps, and can be applied when N is large relative to T (the time dimension of the panel). The proposed test is applied to output series in the Penn World Tables over 1950-2000, as well as to Maddion’s historical series over 1870-2000. Overall, the results do not support output convergence, and suggest that the findings of convergence clubs in the literature might be spurious. However, significant evidence of growth convergence is found, a result which is reasonably robust to the choice of the sample period and country groupings. Non-convergence of log per capita outputs combined with growth convergence suggests that while common technological progress seems to have been diffusing reasonably widely across economies, there are nevertheless important countryspecific factors (for example, wars, famines, revolutions, regime and institutional changes) that render output gaps highly persistent, such that we can not be sure that the probability for the outputs gaps to lie within a fixed range will be non-zero.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1313.

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Length: 57 pages
Date of creation: Sep 2004
Date of revision:
Publication status: published in: Journal of Econometrics, 2007, 138 (1), 312-355
Handle: RePEc:iza:izadps:dp1313
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  1. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  2. Durlauf, S.N. & Johnson, P.A., 1994. "Multiple Regimes and Cross-Country Growth Behavior," Working papers 9419, Wisconsin Madison - Social Systems.
  3. Durlauf,S.N. & Quah,D.T., 1998. "The new empirics of economic growth," Working papers 3, Wisconsin Madison - Social Systems.
  4. Binder, M. & Pesaran, M.H., 1996. "Stochastic Growth," Cambridge Working Papers in Economics 9615, Faculty of Economics, University of Cambridge.
  5. Camarero, Mariam, & Flôres, R. & C. Tamarit, 2002. "Time series evidence of international output convergence in Mercosur," Computing in Economics and Finance 2002 87, Society for Computational Economics.
  6. Bernard, A.B. & Durlauf, S.N., 1993. "Convergence in International Output," Working papers 93-7, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Bart Hobijn & Philip Hans Franses, 2000. "Asymptotically perfect and relative convergence of productivity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 59-81.
  8. Xavier Sala-i-Martin, 2002. "The Disturbing "Rise" of Global Income Inequality," NBER Working Papers 8904, National Bureau of Economic Research, Inc.
  9. Canova, Fabio, 1999. "Testing for Convergence Clubs in Income per-capita: A Predictive Density Approach," CEPR Discussion Papers 2201, C.E.P.R. Discussion Papers.
  10. Xavier Sala-i-Martin, 2002. "The world distribution of income (estimated from individual country distributions)," Discussion Papers 0102-58, Columbia University, Department of Economics.
  11. Bernard, A.B. & Durlauf, S.N., 1994. "Interpreting Tests of the Convergence Hypothesis," Working papers 9401r, Wisconsin Madison - Social Systems.
  12. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  13. Galor, Oded, 1996. "Convergence? Inferences from Theoretical Models," Economic Journal, Royal Economic Society, vol. 106(437), pages 1056-69, July.
  14. L. Vanessa Smith & Stephen Leybourne & Tae-Hwan Kim & Paul Newbold, 2004. "More powerful panel data unit root tests with an application to mean reversion in real exchange rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(2), pages 147-170.
  15. Bianchi, Marco, 1997. "Testing for Convergence: Evidence from Non-parametric Multimodality Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(4), pages 393-409, July-Aug..
  16. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November.
  17. Nazrul Islam, 2003. "What have We Learnt from the Convergence Debate?," Journal of Economic Surveys, Wiley Blackwell, vol. 17(3), pages 309-362, 07.
  18. Binder, Michael & Pesaran, M Hashem, 1999. " Stochastic Growth Models and Their Econometric Implications," Journal of Economic Growth, Springer, vol. 4(2), pages 139-83, June.
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