Output gap and non-linear economic convergence

We apply unit root tests in a multivariate TAR model with bootstrapping simulations to assess the influence of short-run economic conditions on long-run economic convergence and to extract economic policy implications. We use two different groups of countries whose members share important business cycle characteristics over the period 1953-2010. We show that per capita income convergence is not uniform along the business cycle and our analysis reveals that, apart from growth-led actions and structural reforms to avoid the evolution towards different national stationary states especially within the euro zone short-run stabilisation policies are vividly advised to guarantee long-run economic convergence. (C) 2013 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.