Working Paper: CEPR ID: DP820
Authors: Danny Quah
Abstract: 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.
Keywords: cross-country growth; convergence; Galton's fallacy; regression towards the mean; transition matrix; stochastic kernel
JEL Codes: C10; C22; C23; E17; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial income levels (D31) | growth rates (O40) |
| initial income levels (D31) | convergence (O47) |
| growth rates (O40) | income disparity (D31) |
| initial income levels (D31) | income mobility (J62) |
| income distributions (D31) | convergence hypothesis (F62) |