Some econometric issues in convergence regressions

Despite the abundance of different econometric techniques introduced in the empirical literature on convergence, it is usually assumed that shocks are uncorrelated across countries. This is unlikely for most of the data sets considered and we investigate a possibility so far ignored, namely the annual panel estimator where shocks are allowed to be correlated. Our analysis is restricted to the case of T > N which allows us to estimate by maximum likelihood with an unrestricted variance-covariance matrix of cross-country shocks. We examine by Monte Carlo robustness against certain possible misspecifications, namely measurement error and heterogeneity of the convergence coefficients.