| Abstract |
This paper uses the Solow growth model and the panel data method to examine the effect of trade liberalization and the federal equalization transfers on income convergence among Canadian provinces between 1981 and 2006. Estimation problems of weak instruments and endogenous regressors are addressed by the use of a system generalized method of moment (GMM) estimator. The results from the empirical analysis indicate that the current rate of convergence of personal income in Canada is 4.41 percent per year. This rate is considerably higher than the range of 1.80 and 2.41 percent per year that previous studies using least square estimators have reported. The findings from the policy analysis show that the launching and expansion of the North America regional integration have de-accelerated the convergence speed for Canadian provinces by 3.99 and 3.15 percent per year respectively. However, consistent with the results from previous studies, the fiscal transfers, which are part of the federal equalization program, have accelerated the convergence speed for Canadian provinces. |