A contribution to the empirics of convergence in real GDP growth: the role of financial crises and exchange-rate regimes

ABSTRACT

This paper investigates the convergence in real gross domestic product growth focusing on the impact of financial crises (i.e. banking crises, currency crises and debt crises) and nominal exchange-rate regimes (i.e. fixed, intermediate and flexible) on convergence. To that end, we compute four convergence indicators (σ-convergence, γ-convergence, absolute β-convergence and conditional β-convergence) for 163 countries classified into four income groups during the period 1970–2011. The results suggest that (i) there is evidence in favour of σ-convergence and γ-convergence only for high-income countries; (ii) absolute and conditional β-convergence are present in each of the four income groups of the countries under study; (iii) exchange-rate regimes seem to play some role in upper-middle and lower-middle-income countries; and (iv) financial crises have a negative and significant impact on GDP growth independently of the income level of the countries.

KEYWORDS:

• Convergence indicators
• financial crises
• nominal exchange-rate regimes

JEL CLASSIFICATION:

• O47
• G15
• F33

Acknowledgements

The authors thank the insightful comments of two anonymous referees and the editor that have helped to substantially improve this paper. We also thank Ethan Ilzetzki for kindly providing us with the updated database on exchange-rate arrangements. Responsibility for any remaining errors rests with the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplemental data for this article can be accessed here.

Notes

¹ We compute the significance of γ-convergence using 2(n – 1)R ≈ $x_{n-1}^2$.

² Note that several trade-offs are involved in the choice of the growth episode length (k). While k = 1 maximizes the number of observations, this strategy may lead to estimates that are fully driven by business-cycle fluctuations and suffer from serious endogeneity. To mitigate these problems, k is usually set equal to 5, although this strategy greatly reduces the number of observations and introduces some arbitrariness about the selection of the first and last unusable observations; we try to minimize this using several starting and end points and using regressors in the right-hand side of Equations (3) and (5) which are predetermined with respect to the 5-year forward average growth rate.

³ The full sample of countries used in the analysis of convergence can be seen in Table A1.

⁴ See a full description of de facto regimes in Table A2.

⁵ We consider three basic panel regression methods: the FE method, the random effects (RE) model and the pooled-OLS method. In order to determine the empirical relevance of each of the potential methods for our panel data, we make use of several statistic tests. In particular, we test FE versus RE using the Hausman test statistic to test for non-correlation between the unobserved effect and the regressors. To choose between pooled-OLS and RE, we use Breusch and Pagan (1980)’s Lagrange multiplier test to test for the presence of an unobserved effect. Finally, we use the F test for fixed effects to test whether all unobservable individual effects are zero, in order to discriminate between pooled-OLS and RE. To save space, we do not show these tests here. They are available from the authors upon request.

Additional information

Funding

This work is supported by the Government of Spain [grant number ECO2011-23189].