A pair-wise approach to testing for output and growth convergence

• Published in: Journal of econometrics 2007-05, Vol.138 (1), p.312-355
• Main Author: Hashem Pesaran, M.
• Format: Article
• Language: English
• Subjects: Common technological shocks; Convergence; Econometrics; Economic growth; Economic shock; Modelling; Monte Carlo simulation; Output; Output gap; Output rate; Panel data; Panel data models; Statistical models; Studies
• ISSN: 0304-4076; 1872-6895
• DOI: 10.1016/j.jeconom.2006.05.024

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, or other non-stationary common components and does not involve the choice of a reference country in computation of output gaps. It is also applicable when N is large relative to T (the time dimension of the panel). After providing some encouraging Monte Carlo evidence on the small sample properties of the pair-wise test, the test is applied to output series in the Penn World Tables over 1950–2000. 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 country-specific factors that render output gaps highly persistent, such that we cannot be sure that the probability for the output gaps to lie within a fixed range will be non-zero.