Working Paper: CEPR ID: DP1794
Authors: Angel de la Fuente
Abstract: This paper illustrates how convergence equations can be used to analyse the dynamics of the income distribution, thus overcoming some of the limitations of this methodology noted by Quah. Using panel data for a sample of OECD countries, we estimate a growth equation that relates the growth rate of income per capita to the rates of accumulation of physical, human and technological capital, the share of government expenditures in GDP and the behaviour of the labour market, while allowing for the main convergence mechanisms identified in the literature. The estimated model and the underlying data are then used in a convergence accounting exercise, which yields quantitative estimates of the contribution of each of these variables to the relative growth performance of each country and to observed income convergence in the sample.
Keywords: growth; convergence; distribution; dynamics
JEL Codes: 040; 057
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| diminishing returns to scale (D24) | income per capita (D31) |
| technological diffusion (O33) | income per capita (D31) |
| flexible labor market and high R&D investment (O39) | relative growth performance (O40) |
| rigid labor markets and low investment rates (J48) | growth (O40) |
| increase in government size (H11) | productivity (O49) |
| investment in physical and human capital (J24) | convergence (O47) |