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Galton's Fallacy and Tests of the Convergence Hypothesis

Danny Quah
The Scandinavian Journal of Economics
Vol. 95, No. 4, Endogenous Growth (Dec., 1993), pp. 427-443
Published by: Wiley on behalf of The Scandinavian Journal of Economics
DOI: 10.2307/3440905
Stable URL: http://www.jstor.org/stable/3440905
Page Count: 17
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Galton's Fallacy and Tests of the Convergence Hypothesis
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Abstract

Recent tests for the convergence hypothesis derive from regressing average growth rates on initial levels: a negative initial level 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.

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