DP1265 The Poor Stay Poor: Non-Convergence Across Countries and Regions
|Author(s):||Fabio Canova, Albert Marcet|
|Publication Date:||November 1995|
|Keyword(s):||Convergence, Income Inequalities, Panel Data, Persistence, Prior Distribution|
|JEL(s):||C11, C23, D90, O47|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1265|
We study the issue of income convergence across countries and regions with a Bayesian model which allows us to use information in an efficient and flexible way. We argue that the very slow convergence rates to a common level of per-capita income found, for example, by Barro and Sala-i-Martin, is due to a 'fixed effect bias' that their cross-sectional analysis introduces in the results. Our approach permits the estimation of different convergence rates to different steady states for each cross-sectional unit. When this diversity is allowed, we find that convergence of each unit to (its own) steady-state income level is much faster than previously estimated, but that cross-sectional differences persist: inequalities will only be reduced by a small amount by the passage of time. The cross-country distribution of the steady state is largely explained by the cross-sectional distribution of initial conditions.