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: www.cepr.org/pubs/dps/DP820.asp

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.