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.