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Abstract:

Econometrics Paper
Galton's Fallacy and Tests of the Convergence Hypothesis (Now published in Scandinavian Journal of Economics 95 (4), 1993, pp.427-443.)
Danny Quah  1993
Paper No' EM/1993/265:


Tags: convergence hypothesis; regressing average growth rates; galton's fallacy; coefficients of arbitrary signs; divergence of cross-country incomes.

Recent tests for the convergence hypothesis derive from regressing average growth rates on initial levels: a negative initial coefficient is interpreted as convergence. These tests turn out to be plagued by 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.