Francesco Caselli, Gerardo Esquivel and Fernando Lefort (1996) examine the empirical evidence on economic convergence and find that existing studies suffer from two main issues: correlated individual effects and endogenous explanatory variables. They use a generalized method of moments estimator to address these problems and find that per capita incomes converge to their steady-state levels at a rate of approximately 10% per year, contradicting the current consensus of 2%. They also reject both the standard and augmented versions of the Solow model. The paper argues that the existing empirical literature on cross-country growth is inconsistent due to these issues. The authors propose a panel data, general method of moments estimator that eliminates both problems. They apply this estimator to test the Solow model and find that the capital share in output is much lower than previously estimated. They also apply the estimator to a "determinants of growth" regression and find that the convergence coefficient is much higher than previously estimated. The authors conclude that the high rate of convergence implies that economies spend most of their time in a neighborhood of their steady state. They also find that substantial differences in technology may play an important role in generating this dispersion in steady-state levels. The findings challenge the standard neoclassical growth models and suggest that the relevant notion of capital is restricted to physical capital only. The paper also discusses the implications of these findings for growth theory and suggests that open economy extensions of the standard neoclassical model generally feature a higher speed of convergence. The authors conclude that their results are consistent with a more general formulation of the growth model.Francesco Caselli, Gerardo Esquivel and Fernando Lefort (1996) examine the empirical evidence on economic convergence and find that existing studies suffer from two main issues: correlated individual effects and endogenous explanatory variables. They use a generalized method of moments estimator to address these problems and find that per capita incomes converge to their steady-state levels at a rate of approximately 10% per year, contradicting the current consensus of 2%. They also reject both the standard and augmented versions of the Solow model. The paper argues that the existing empirical literature on cross-country growth is inconsistent due to these issues. The authors propose a panel data, general method of moments estimator that eliminates both problems. They apply this estimator to test the Solow model and find that the capital share in output is much lower than previously estimated. They also apply the estimator to a "determinants of growth" regression and find that the convergence coefficient is much higher than previously estimated. The authors conclude that the high rate of convergence implies that economies spend most of their time in a neighborhood of their steady state. They also find that substantial differences in technology may play an important role in generating this dispersion in steady-state levels. The findings challenge the standard neoclassical growth models and suggest that the relevant notion of capital is restricted to physical capital only. The paper also discusses the implications of these findings for growth theory and suggests that open economy extensions of the standard neoclassical model generally feature a higher speed of convergence. The authors conclude that their results are consistent with a more general formulation of the growth model.