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Note on the interpretation of the convergence speed in the dynamic panel model

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  • Masahiko Shibamoto
  • Yoshiro Tsutsui

Abstract

Studies using dynamic panel regression approach have found a high speed of income convergence among the world and the regional economies. For example, Lee et al. (1997, 1998) report 30% per annum. This note argues that their estimates of the convergence speed can be seriously overstated. Using a factor model, we show that the coefficient of the lagged income in their specification may not be the long-run convergence speed, but the adjustment speed of the short-run deviation from the long-run equilibrium path. We give an example of an empirical analysis, where the short-run adjustment speed is about 40%.

Suggested Citation

  • Masahiko Shibamoto & Yoshiro Tsutsui, 2014. "Note on the interpretation of the convergence speed in the dynamic panel model," Applied Economics Letters, Taylor & Francis Journals, vol. 21(8), pages 533-535, May.
  • Handle: RePEc:taf:apeclt:v:21:y:2014:i:8:p:533-535
    DOI: 10.1080/13504851.2013.872754
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    References listed on IDEAS

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    1. Kevin Lee & M. Hashem Pesaran & Ron Smith, 1998. "Growth Empirics: A Panel Data Approach—A Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 319-323.
    2. Lee, Kevin & Pesaran, M Hashem & Smith, Ron, 1997. "Growth and Convergence in Multi-country Empirical Stochastic Solow Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(4), pages 357-392, July-Aug..
    3. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    4. Phillips, Peter & Sul, Donggyu, 2002. "Dynamic Panel Estimation and Homogenity Testing Under Cross Section Dependence," Working Papers 194, Department of Economics, The University of Auckland.
    5. Shibamoto, Masahiko & Tsutsui, Yoshiro & Yamane, Chisako, 2016. "Understanding regional growth dynamics in Japan: Panel co-integration approach utilizing the PANIC method," Journal of the Japanese and International Economies, Elsevier, vol. 40(C), pages 17-30.
    6. Shioji, Etsuro, 2001. "Public Capital and Economic Growth: A Convergence Approach," Journal of Economic Growth, Springer, vol. 6(3), pages 205-227, September.
    7. Nazrul Islam, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 1127-1170.
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    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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