DP820 Galton's Fallacy and Tests of the Convergence Hypothesis

Author(s):	Danny Quah
Publication Date:	July 1993
Keyword(s):	Convergence, Cross-country growth, Galton's Fallacy, Regression Towards the Mean, Stochastic Kernel, Transition Matrix
JEL(s):	C10, C22, C23, E17, O40
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=820

Recent tests for the convergence hypothesis derive from regressing average growth rates on initial levels: a negative initial level coefficient is interpreted as convergence. These tests turn out to be plagued by Francis Galton's classical fallacy of regression towards the mean. Using a dynamic version of Galton's fallacy, I establish that coefficients of arbitrary signs in such regressions are consistent with an unchanging cross-section distribution of incomes. Alternative, more direct empirics used here show a tendency for divergence, rather than convergence, of cross-country incomes.