Spatial and Spatio-Temporal Error Correction, Networks and Common Correlated Effects
Essays in Honor of M. Hashem Pesaran: Panel Modeling, Micro Applications, and Econometric Methodology
ISBN: 978-1-80262-066-5, eISBN: 978-1-80262-065-8
Publication date: 18 January 2022
The authors provide a way to represent spatial and temporal equilibria in terms of error correction models in a panel setting. This requires potentially two different processes for spatial or network dynamics, both of which can be expressed in terms of spatial weights matrices. The first captures strong cross-sectional dependence, so that a spatial difference, suitably defined, is weakly cross-section dependent (granular) but can be non-stationary. The second is a conventional weights matrix that captures short-run spatio-temporal dynamics as stationary and granular processes. In large samples, cross-section averages serve the first purpose and the authors propose the mean group, common correlated effects estimator together with multiple testing of cross-correlations to provide the short-run spatial weights. The authors apply this model to the 324 local authorities of England, and show that our approach is useful for modeling weak and strong cross-section dependence, together with partial adjustments to two long-run equilibrium relationships and short-run spatio-temporal dynamics. This exercise provides new insights on the (spatial) long-run relationship between house prices and income in the UK.
We are grateful for comments from participants of seminars at National Institute of Economic and Social Research (NISER), University of Birmingham, University of Swansea, IAAE Webinar, and the 19th International Workshop on Spatial Econometrics and Statistics (SEW), comments from one anonymous referee and Alex Chudik. Jan Ditzen acknowledges financial support from Italian Ministry MIURunder the PRIN project Hi-Di NET - Econometric Analysis of High Dimensional Models with Network Structures in Macroeconomics and Finance (grant 2017TA7TYC). All remaining errors are our own.
Bhattacharjee, A., Ditzen, J. and Holly, S. (2022), "Spatial and Spatio-Temporal Error Correction, Networks and Common Correlated Effects", Chudik, A., Hsiao, C. and Timmermann, A. (Ed.) Essays in Honor of M. Hashem Pesaran: Panel Modeling, Micro Applications, and Econometric Methodology (Advances in Econometrics, Vol. 43B), Emerald Publishing Limited, Bingley, pp. 37-60. https://doi.org/10.1108/S0731-90532021000043B003
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