Understanding regional growth dynamics in Japan: Panel co-integration approach utilizing the PANIC method

•This study aims at understanding regional growth dynamics in Japanese prefectures.•A panel co-integration approach with the PANIC method describes a detailed picture.•There is one common source of growth to which prefectures attach different weights.•The per capita income of follower-prefectures will catch up to that of leaders.•Deviation from the equilibrium captures the change in pace of shrink in income gaps.

This study proposes a panel co-integration approach using the PANIC method for understanding the regional growth dynamics using non-stationary panel data, and applies it to Japanese prefectures. This approach enables us to analyze both long-run equilibrium growth path and short-run dynamics across the regions. Specifically, we find that there is one common source of growth to which prefectures attach different weights, that the per capita real income of follower-prefectures will catch up to that of leader-prefectures, and that temporal fluctuations of the catch-up process elicited by Barro type regression qualitatively corresponds to short-run dynamics across prefectures by the PANIC method.