Conditional convergence and the dynamics of the capital-output ratio |
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Authors: | Kieran McQuinn Karl Whelan |
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Institution: | (1) Central Bank and Financial Services Authority of Ireland, Dublin, Ireland |
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Abstract: | Output per worker can be expressed as a function of technological efficiency and of the capital-output ratio. Because technology
is exogenous in the Solow model, all of the endogenous convergence dynamics take place through the adjustment of the capital-output
ratio. This paper uses the empirical behavior of the capital-output ratio to estimate the speed of conditional convergence
of economies towards their steady-state paths. We find that the conditional convergence speed is about seven percent per year.
This is somewhat faster than predicted by the Solow model and is significantly higher than reported in most previous studies
based on output per worker regressions. We show that, once there are stochastic shocks to technology, standard panel econometric
techniques produce downward-biased estimates of convergence speeds, while our approach does not.
The views expressed in this paper are our own, and do not necessarily reflect the views of the Central Bank and Financial
Services Authority of Ireland or the ESCB. |
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Keywords: | Convergence Solow Model Panel Data |
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