Description

There are two sources of inconsistency in existing cross-country empirical work on growth: correlated individual effects and endogenous explanatory variables. We estimate a variety of cross-country growth regressions using a generalized method of moments estimator that eliminates both problems. In one application, we find that per capita incomes converge to their steady-state levels at a rate of approximately 10% per year. This result stands in sharp contrast to the current consensus, which places the convergence rate at 2%. We discuss the theoretical implications of this finding. In another application, we perform a test of the Solow model. Again, contrary to prior results, we reject both the standard and the augmented version of the model.