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International Output Convergence, Breaks, and Asymmetric Adjustment

Dimitris, Chrsitopoulos and Miguel, Leon-Ledesma (2009): International Output Convergence, Breaks, and Asymmetric Adjustment.

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Abstract

We present time series evidence on output convergence for 14 countries relative to the US for the 1900-2000 period. We develop tests that allow for an unknown number of breaks in the series and also asymmetric convergence speed. We show that this asymmetry arises theoretically when the economy is not in the neighbourhood of the steady state. Breaks are modelled through a Fourier function fitted to the deterministic part of a time series and asymmetries are modelled as a smooth transition function that matches the theory predictions. The tests are shown to have good finite sample properties. The results support the existence of convergence towards a mean that displays a break around WWII. These breaks, in the majority of cases, appear to be permanent. Asymmetric mean reversion also appears to be an important feature driving convergence for most countries in the sample. These results emphasize the importance that disruptive historical events have on the dynamics of relative outputs.

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