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Income Convergence: The Dickey-Fuller Test under the Simultaneous Presence of Stochastic and Deterministic Trends

Manuel Gómez-Zaldívar and Daniel Ventosa-Santaulària ()

No EM200703, Department of Economics and Finance Working Papers from Universidad de Guanajuato, Department of Economics and Finance

Abstract: We investigate the efficiency of the Dickey-Fuller (DF) test as a tool to examine the convergence hypothesis. In doing so, we first describe two possible outcomes, overlooked in previous studies, namely Loose Catching-up and Loose Lagging-behind. Results suggest that this test is useful when the intention is to discriminate between a unit root process and a trend stationary process, though unreliable when used to differentiate between a unit root process and a process with both deterministic and stochastic trends. This issue may explain the lack of support for the convergence hypothesis in the aforementioned literature.

Keywords: Divergence; Loose Catching-up/Lagging-behind; Convergence; Deterministic and Stochastic trends (search for similar items in EconPapers)
JEL-codes: C32 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2007-03
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Published in Brazilian Review of Econometrics (forthcoming)

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Working Paper: Income convergence: the Dickey-Fuller test under the simultaneous presence of stochastic and deterministic trends (2007) Downloads
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