Geographic spillover and growth (a spatial econometric analysis for european regions)

The aim o f this paper is to integrate the geographical dimension o f data in the estimation o f the convergence o f European regions and emphasize the importance o f spatial effects in regional economic growth phenomena. In a sample o f 122 European regions over the 1980-1995 period, we find strong evidence o f spatial autocorrelation in the unconditional /^-convergence model using spatial econometric methods with different weight matrices: a simple contiguity matrix and 4 distance-based matrices. Therefore, this standard beta-convergence model exhibit misspecification, its estimation by OLS leads to inefficient estimators and invalid statistical inference. We suggest then a "minimal" specification o f beta-convergence, which integrates and treats adequately the spatial autocorrelation detected.. Moreover, this model is interpreted as a conditional /^-convergence model revealing a spatial spillover effect between European regions. Therefore the European regions are interdependent and we show by a simulation experiment that a random shock affecting a given region propagates to all the regions o f the sample.