RIEB, Kobe University

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%.