Title

Transition Modeling and Econometric Convergence Tests

Publication Type

Journal Article

Publication Date

11-2007

Abstract

A new panel data model is proposed to represent the behavior of economies in transition, allowing for a wide range of possible time paths and individual heterogeneity. The model has both common and individual specific components, and is formulated as a nonlinear time varying factor model. When applied to a micro panel, the decomposition provides flexibility in idiosyncratic behavior over time and across section, while retaining some commonality across the panel by means of an unknown common growth component. This commonality means that when the heterogeneous time varying idiosyncratic components converge over time to a constant, a form of panel convergence holds, analogous to the concept of conditional sigma convergence. The paper provides a framework of asymptotic representations for the factor components that enables the development of econometric procedures of estimation and testing. In particular, a simple regression based convergence test is developed, whose asymptotic properties are analyzed under both null and local alternatives, and a new method of clustering panels into club convergence groups is constructed. These econometric methods are applied to analyze convergence in cost of living indices among 19 U.S. metropolitan cities

Keywords

Club convergence, relative convergence, common factor, convergence, log t regression test, panel data, transition.

Discipline

Econometrics

Research Areas

Econometrics

Publication

Econometrica

Volume

75

Issue

6

First Page

1771

Last Page

1855

ISSN

0012-9682

Publisher

Econometric Society

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