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: www.cepr.org/pubs/dps/DP1383.asp

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.