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Unconditional maximum likelihood estimation of dynamic models for spatial panels

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  • Elhorst, J. Paul

    (Groningen University)

Abstract

This paper hammers out the estimation of a fixed effects dynamic panel data model extended either to include spatial error autocorrelation or a spatially lagged dependent variable. To overcome the inconsistencies associated with the traditional least squares dummy estimator, the models are first-differenced to eliminate the fixed effects and then the unconditional likelihood function is derived taking into account the density function of the first-differenced observations on each spatial unit. When exogenous variables are omitted, the exact likelihood function of both models is found to exist. When exogenous variables are included, the presample values of these variables and thus the likelihood function must be approximated. Two leading cases are considered: the Bhargava and Sargan approximation and the Nerlove and Balestra approximation. As an application, a dynamic demand model for cigarettes is estimated based on panel data from 46 American states over the period 1963 to 1992.

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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 03C27.

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Date of creation: 2003
Date of revision:
Handle: RePEc:dgr:rugsom:03c27

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  1. Anselin, Luc & Hudak, Sheri, 1992. "Spatial econometrics in practice : A review of software options," Regional Science and Urban Economics, Elsevier, vol. 22(3), pages 509-536, September.
  2. Baltagi, Badi H & Levin, Dan, 1986. "Estimating Dynamic Demand for Cigarettes Using Panel Data: The Effects of Bootlegging, Taxation and Advertising Reconsidered," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 148-55, February.
  3. Bhargava, Alok & Sargan, J D, 1983. "Estimating Dynamic Random Effects Models from Panel Data Covering Short Time Periods," Econometrica, Econometric Society, vol. 51(6), pages 1635-59, November.
  4. Harald Badinger & Werner Muller & Gabriele Tondl, 2004. "Regional Convergence in the European Union, 1985- 1999: A Spatial Dynamic Panel Analysis," Regional Studies, Taylor & Francis Journals, vol. 38(3), pages 241-253.
  5. Arellano, Manuel, 1989. "A note on the Anderson-Hsiao estimator for panel data," Economics Letters, Elsevier, vol. 31(4), pages 337-341, December.
  6. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
  7. Elhorst, J.P., 2000. "Dynamic models in space and time," Research Report 00C16, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  8. Ahn, Seung C. & Schmidt, Peter, 1997. "Efficient estimation of dynamic panel data models: Alternative assumptions and simplified estimation," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 309-321.
  9. Hsiao, Cheng & Hashem Pesaran, M. & Kamil Tahmiscioglu, A., 2002. "Maximum likelihood estimation of fixed effects dynamic panel data models covering short time periods," Journal of Econometrics, Elsevier, vol. 109(1), pages 107-150, July.
  10. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  11. Baltagi, Badi H. & Levin, Dan, 1992. "Cigarette taxation: Raising revenues and reducing consumption," Structural Change and Economic Dynamics, Elsevier, vol. 3(2), pages 321-335, December.
  12. Badi H. Baltagi & James M. Griffin & Weiwen Xiong, 2000. "To Pool Or Not To Pool: Homogeneous Versus Hetergeneous Estimations Applied to Cigarette Demand," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 117-126, February.
  13. Hahn, Jinyong, 1999. "How informative is the initial condition in the dynamic panel model with fixed effects?," Journal of Econometrics, Elsevier, vol. 93(2), pages 309-326, December.
  14. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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Cited by:
  1. Jonathan Jones & Colin Wren, 2008. "FDI Location Across British Regions and Inward Investment Policy," SERC Discussion Papers 0013, Spatial Economics Research Centre, LSE.
  2. Colin Wren & Jonathan Jones, 2011. "Assessing The Regional Impact Of Grants On Fdi Location: Evidence From U.K. Regional Policy, 1985–2005," Journal of Regional Science, Wiley Blackwell, vol. 51(3), pages 497-517, 08.
  3. José-Antonio Monteiro & Madina Kukenova, 2009. "Spatial Dynamic Panel Model and System GMM: A Monte Carlo Investigation," IRENE Working Papers 09-01, IRENE Institute of Economic Research.
  4. Minfeng Deng & George Athanasopoulos, 2009. "Modelling Australian Domestic and International Inbound Travel: a Spatial-Temporal Approach," Monash Econometrics and Business Statistics Working Papers 10/09, Monash University, Department of Econometrics and Business Statistics.

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