International Income Convergence to a Common Trend and Long Run Growth Estimation Using Economic Institutions of OECD Economies

Abstract

In traditional studies of regional income convergence, the economies are assumed to follow a common long-run trend determined by common technology. For the group of OECD economies, this is a defensible assumption. In this paper, we estimate this long run component by recovering estimates of steady-state levels of output from the standard convergence estimates in a panel data set. We use institutional indicators to help estimate production technology. Results indicate that many OECD economies were above their steady states last decade, explaining the subsequent slower pace of long-run growth.