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Prediction in the Panel Data Model with Spatial Correlation: The Case of Liquor

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Abstract

This paper considers the problem of prediction in a panel data regression model with spatial autocorrelation in the context of a simple demand equation for liquor. This is based on a panel of 43 states over the period 1965-1994. The spatial autocorrelation due to neighboring states and the individual heterogeneity across states is taken explicitly into account. We compare the performance of several predictors of the states demand for liquor for one year and five years ahead. The estimators whose predictions are compared include OLS, fixed effects ignoring spatial correlation, fixed effects with spatial correlation, random effects GLS estimator ignoring spatial correlation and random effects estimator accounting for the spatial correlation. Based on RMSE forecast performance, estimators that take into account spatial correlation and neterogeneity across the states perform the best for one year ahead forecasts. However, for two to five years ahead forecasts, estimators that take into account the heterogeneity across the states yield the best forecasts.

Suggested Citation

  • Badi H. Baltagi & Dong Li, 2006. "Prediction in the Panel Data Model with Spatial Correlation: The Case of Liquor," Center for Policy Research Working Papers 84, Center for Policy Research, Maxwell School, Syracuse University.
  • Handle: RePEc:max:cprwps:84
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    1. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
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    6. Kajal Lahiri, 2005. "Analysis of Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 1093-1095.
    7. Baillie, R.T. & Baltagi, B.H., 1994. "Prediction from the Regression Model with one-way Error Components," Papers 9405, Michigan State - Econometrics and Economic Theory.
    8. Baltagi, Badi H & Griffin, James M, 1995. "A Dynamic Demand Model for Liquor: The Case for Pooling," The Review of Economics and Statistics, MIT Press, vol. 77(3), pages 545-554, August.
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    More about this item

    Keywords

    prediction; spatial correlation; panel data; liquor demand;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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