European incomplete catching-up

We study in this paper pairwise convergence of aggregate output dynamics by applying a known exact, finite-sample, most powerful and invariant (MPI) test statistic in a new analytical, conditional inverted beta setup. Besides being useful for finding interval estimates of a persistence parameter when needed, it turns out that our IB-MPI test has a comparable power to discriminate near-unit roots. By using standard, time-series definitions of divergence, incomplete or complete catching-up, and long-run convergence, the empirical application of the test shows that pairwise differences in per capita income levels between European countries overwhelmingly follow a trend-stationary, incomplete catching-up process.