Hidden Markov models as an example of an alternative approach to convergence

In this chapter, the definition, basic theory, and terminology related to hidden Markov models (HMMs) are presented. The applicability of this tool in economic sciences is emphasized. A large part of the chapter covers the detailed description of the procedure involving HMM, Viterbi path, and Monte Carlo simulation to quantify the most probable sequence of states representing the studied phenomenon. This procedure is the basis of the convergence analysis and allows us to reflect the change of the relationships between countries or regions over the years, including the degree of convergence or divergence. The last section of this chapter is devoted to the presentation of the research methodology behind the HMM approach to the analysis of convergence phenomenon.