Convergence Patterns in Growth and Financial Development: Evidence from Club Convergence

This paper analyses the degree of convergence in financial development and in per capita output for a panel of 50 countries, in different stages of development. To perform our analysis, we utilize the methodology of Phillips and Sul (2007), which is based on a general form of a nonlinear time varying factor model and it allows to assess the existence of convergence clubs. Nine alternative financial development indicators are employed in order to examine different functions of the financial system. Overall, the results do not support the hypothesis that all countries in the sample are converging to a single equilibrium state in per-capita output, and in financial development. Nevertheless, there is strong evidence of club convergence. Empirical findings indicate seven distinct convergence clubs in per capita output which can be interpreted as an evidence of significant output heterogeneity. In the case of financial development, countries demonstrate a high degree of convergence in the sense that they form only two or three converging clubs, depending on the measure of financial development used.