A new approach to the relative convergence test

Jihun Kwak

Applied Economics Letters, 2022, vol. 29, issue 7, 597-603

Abstract: This article proposes a new approach to the relative convergence test. The original relative convergence test proposed by Phillips and Sul (2007) recommends discarding the first 1/3 of the time-series data to achieve the best performance in terms of the size and power of the test. My new approach to the relative convergence test does not require discarding any time-series data by assuming the unobservable data are already discarded. In this article, I compare the new approach to the Phillips and Sul (2007)’s test and determine, through a Monte-Carlo simulation, at what fraction the new approach achieves the best performance in terms of size and power of the test. I confirm that the new approach performs better than the original approach when the fraction is set 1/10 of a penalty function. To compare my new method to the Phillips and Sul (2007) method, I provide an empirical example using the U.S. Per Capita Personal Income data and how the new approach affects the convergence club classification.

Date: 2022
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DOI: 10.1080/13504851.2021.1878090

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