Note on the Interpretation of Convergence Speed in the Dynamic Panel Model
Studies using the dynamic panel regression approach have found the speed of income convergence among the world and regional economies to be high. For example, Lee et al. (1997, 1998) report the income convergence speed to be 30% per annum. This note argues that their estimates may 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%.
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243, Research Institute for Economics & Business Administration, Kobe University, revised Mar 2016.
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1362, Cowles Foundation for Research in Economics, Yale University.
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- 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.
- Shioji, Etsuro, 2001. "Public Capital and Economic Growth: A Convergence Approach," Journal of Economic Growth, Springer, vol. 6(3), pages 205-227, September.
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