Since Italy’s monetary unification some 155 years ago, income per capita in the South (the Mezzogiorno) has fallen from virtually the same level as in the Centre-North to little more than 55% of the Centre-North’s level. This column asks why East Germany hasn’t suffered the same fate since German monetary unification 25 years ago. East Germany is not like the Mezzogiorno because of labour market flexibility, different evolutions of the tradeable sector, and the weight of history.
Andrea Boltho, Wendy Carlin, Pasquale Scaramozzino, 13 June 2016
Michele Battisti, Gianfranco di Vaio, Joseph Zeira, 09 January 2014
A key question in economics is whether poor countries will automatically close the income gap with rich countries. However, different empirical methods yield different answers – growth regressions suggest convergence, whereas tests of distribution dynamics suggest divergence. This column discusses recent research that reconciles these two strands of the literature. It extends the benchmark growth regression model to include a parameter that determines the share of new technologies a country can adopt each year. The result is that, although each country converges to a growth path, the growth paths themselves may diverge.