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Panel Data Inference Under Spatial Dependence

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  • BALTAGI B-H.
  • PIROTTE A.

Abstract

This paper focuses on inference based on the usual panel data estimators of a one-way error component regression model when the true specification is a spatial error component model. Among the estimators considered, are pooled OLS, random and fixed effects, maximum likelihood under normality, etc. The spatial effects capture the cross-section dependence, and the usual panel data estimators ignore this dependence. Two popular forms of spatial autocorrelation are considered, namely, spatial auto-regressive random effects (SAR-RE) and spatial moving average random effects (SMA-RE). We show that when the spatial coefficients are large, test of hypothesis based on the usual panel data estimators that ignore spatial dependence can lead to misleading inference.
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Suggested Citation

  • Baltagi B-H. & Pirotte A., 2009. "Panel Data Inference Under Spatial Dependence," Working Papers ERMES 0907, ERMES, University Paris 2.
    • Handle: RePEc:erm:papers:0907
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    File URL: http://ermes.u-paris2.fr/doctrav/0907
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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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