TEST OF THE CONVERGENCE HYPOTHESIS ALLOWING FOR CROSS-SECTIONAL DEPENDENCE

A large empirical literature has investigated whether per capita output converges around a common trend across national and regional economies. The methods used in this literature assume no cross‐sectional dependence even though it is likely to be present and might be important in practice. Chang has devised a promising method of testing for unit roots in heterogeneous panels with cross‐sectional dependence. We apply her method to test whether convergence takes place across three samples of economies: 15 advanced industrial countries; a broader group of 57 countries; and the 48 contiguous US states. We find evidence of convergence for the 15 advanced industrial economies but no evidence of convergence across either the broad group of countries or the US states.