Introduction to Modern Economic Growth (3.8) yields the regression equation: (3.9) gi,t,t−1 = b0 + b1 log yi,t−1 + εi,t , where gi,t,t−1 is the growth rate of country i between dates t − and t, log yi,t−1 is the “initial” (i.e., time t − 1) log output per capita of this country, and εi,t is a stochastic term capturing all omitted influences Regressions on this form have been estimated by, among others, Baumol (1986), Barro (1991) and Barro and Salai-Martin (1992) If such an equation is estimated in the sample of core OECD countries, b1 is indeed estimated to be negative; countries like Greece, Spain and Portugal that were relatively poor at the end of World War II have grown faster than the rest as shown in Figure 1.15 in Chapter Yet, Figure 1.14 in Chapter shows, when we look at the whole world, there is no evidence for a negative b1 Instead, this figure makes it clear that, if anything, b1 would be positive In other words, there is no evidence of world-wide convergence Barro and Sala-i-Martin refer to this type of convergence as “unconditional convergence,” meaning the convergence of countries regardless of differences in characteristics and policies However, this notion of unconditional convergence may be too demanding It requires that there should be a tendency for the income gap between any two countries to decline, irrespective of what types of technological opportunities, investment behavior, policies and institutions these countries have If countries differ with respect to these factors, the Solow model would not predict that they should converge in income level Instead, each should converge to their own level of steady-state income per capita or balanced growth path Thus in a world where countries differ according to their characteristics, a more appropriate regression equation may take the form: (3.10) gi,t,t−1 = b0i + b1 log yi,t−1 + εi,t , where the key difference is that now the constant term, b0i , is country specific (In principle, the slope term, measuring the speed of convergence, b1 , should also be country specific, but in empirical work, this is generally taken to be a constant, and we assume the same here to simplify the exposition) One may then model b0i as 111