Stochastic Convergence in Regional Economic Activity

A stochastic model is presented, based on a double process of temporal drift and random disturbance, to fit the evolution of cross-country distribution of income and economic activity. Instead of assuming a steady state as is standard practice, a long run stationary equilibrium distribution is hypothesized, around which economic activity fluctuates. An empirical application comparing dynamics of growth in Asia and Europe tests the validity of the proposed method. In particular, results point out that the distribution of income and economic activity is approaching a long run equilibrium at a faster rate in the case of Asia, and that the dispersion of the distribution is shrinking over time above all in the case of Europe. Main implications are supportive of the convergence hypothesis, and suggest that diffusion may be a potential technique for the analysis of growth dynamics.