DP1383 Convergence, Endogenous Growth, and Productivity Disturbances

Author(s): Charles K Leung, Danny Quah
Publication Date: April 1996
Keyword(s): Cross-country Dependence, Cross-country Regression, Increasing Returns, Stochastic Growth, Time-series Regression
JEL(s): E32, O41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1383

Kelly (1992) has recently shown that evidence on convergence cannot be taken as evidence against endogenous growth in general. This study uses a well-known class of stochastic growth models to show other difficulties with traditional empirical studies of convergence. Key parameters typically cannot be estimated consistently in cross-section regressions. When the parameters are assumed known, implications for convergence are unavailable except under restrictive and economically unmotivated assumptions. Those same assumptions that relate key parameters to cross-country convergence render cross-section regressions impossible to estimate consistently.