Specification and testing of Markov chain models: An application to convergence in the European Union

Recently Markov chains have been used to analyze the convergence properties of national and regional per capita incomes. This paper highlights their applicability and importance for economists and illustrates some of the potential pitfalls associated with this approach. The empirical conclusions, based on data for the period 1975 to 1993, are that the regions of the EU appear to be converging to a form of equilibrium characterized by stable proportions of economies at a range of output per capita levels, and by a permanent chance of mobility between all levels, consistent with the existence of multiple steady-states across countries.