Abstract
Until recently, considerable effort has been devoted to the estimation of panel data regression models without adequate attention being paid to the drivers of interaction amongst cross-section and spatial units. We discuss some new methodologies in this emerging area and demonstrate their use in measurement and inferences on cross-section and spatial interactions. Specifically, we highlight the important distinction between spatial dependence driven by unobserved common factors and those based on a spatial weights matrix. We argue that purely factor-driven models of spatial dependence may be inadequate because of their connection with the exchangeability assumption. The three methods considered are appropriate for different asymptotic settings; estimation under structural constraints when N is fixed and T → ∞, whilst the methods based on GMM and common correlated effects are appropriate when T ≫ N → ∞. Limitations and potential enhancements of the existing methods are discussed, and several directions for new research are highlighted.
Similar content being viewed by others
References
Amemiya T (1973) Regression analysis when the dependent variable is truncated normal. Econometrica 41: 997–1016
Andrews DWK (2005) Cross-section regression with common shocks. Econometrica 73: 1551–1585
Anselin L (1988) Spatial Econometrics: Methods and Models. Kluwer, Dordrecht
Anselin L (1999) Spatial econometrics. In: Baltagi BH (eds) A Companion to Theoretical Econometrics. Blackwell, Oxford, pp 310–330
Anselin L (2002) Under the hood: issues in the specification and interpretation of spatial regression models. Agric Econ 27: 247–267
Anselin L, Florax R, Rey S (2003) Econometrics for spatial models: recent advances. In: Anselin L, Florax R, Rey S (eds) Advances in Spatial Econometrics: Methodology, Tools and Applications.. Springer-Verlag, Berlin, pp 1–25
Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58: 277–297
Bai J (2009) Likelihood approach to small T dynamic panel data models with interactive effects. Paper presented at an Invited Session in the 15th International Panel Data Conference, Bonn, 2009. Mimeo
Bai J, Ng S (2006) Confidence intervals for diffusion index forecasts and inference for factor-augmented regressions. Econometrica 74: 1133–1150
Baltagi BH, Egger P, Pfaffermayr M (2006) A generalized spatial panel data model with random effects. Working paper, Syracuse University, Department of Economics and Center for Policy Research
Baltagi BH, Egger P, Pfaffermayr M (2007) A Monte Carlo study for pure and pretest estimators of a panel data model with spatially autocorrelated disturbances. Ann Econ Stat 87/88: 11–38
Bhattacharjee A, Holly S (2008) Understanding interactions in social networks and committees. Working Paper 1004, Centre for Dynamic Macroeconomic Analysis, University of St Andrews, UK
Bhattacharjee A, Holly S (2009) Taking personalities out of monetary policy decision making? Interactions, heterogeneity and committee decisions in the Bank of England’s MPC. Mimeo. Previous version available as: CDMA Working Paper 0612 (2006), Centre for Dynamic Macroeconomic Analysis, University of St Andrews, UK
Bhattacharjee A, Holly S (2010a) Structural interactions in spatial panels. CDMA Working Paper 10/03, Centre for Dynamic Macroeconomic Analysis, University of St Andrews, UK
Bhattacharjee A, Holly S (2010) Rational partisan theory, uncertainty and spatial voting: evidence for the Bank of England’s MPC. Econ Politics 22: 151–179
Bhattacharjee A, Jensen-Butler C (2005) Estimation of spatial weights matrix in a spatial error model, with an application to diffusion in housing demand. CRIEFF Discussion Paper 0519, University of St Andrews, UK
Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econometrics 87: 115–143
Bramoullé Y, Djebbaria H, Fortin B (2009) Identification of peer effects through social networks. J Econometrics 150: 41–55
Britton E, Fisher PG, Whitley JD (1998) The inflation report projections: understanding the fan chart. Bank Engl Quart Bull 38: 30–37
Conley TG (1999) GMM estimation with cross sectional dependence. J Econometrics 92: 1–45
Conley TG, Molinari F (2007) Spatial correlation robust inference with errors in location or distance. J Econometrics 140: 76–96
Conley TG, Topa G (2002) Socio-economic distance and spatial patterns in unemployment. J Appl Econometrics 17: 303–327
Conley TG, Topa G (2003) Identification of local interaction models with imperfect location data. J Appl Econometrics 18: 605–618
de Finetti B (1937) La prévision: ses lois logiques, ses resources subjectives. Ann Inst H Poincaré 7:1-68. English translation: foresight: its logical laws, its subjective sources. In: Kyburg HE, Smokler HE (eds) Studies in subjective probability, 1964. Wiley, New York, pp 93–158
Dempster A, Laird N, Rubin D (1977) Maximum likelihood for incomplete data via the EM algorithm. J Roy Stat Soc B 39: 1–38
Ertur C, Le Gallo J, Baumont C (2006) The European regional convergence process, 1980-1995: do spatial regimes and spatial dependence matter?. Int Reg Sci Rev 29: 3–34
Fingleton B (2003) Externalities, economic geography and spatial econometrics: conceptual and modeling developments. Int Reg Sci Rev 26: 197–207
Fingleton B (2007) A generalized method of moments estimator for a spatial model with moving average errors, with application to real estate prices. Empir Econ 34: 35–57
Forni M, Hallin M, Lippi M, Reichlin L (2004) The generalized dynamic factor model consistency and rates. J Econometrics 119: 231–255
Gerlach-Kristen P (2004) Is the MPC’s voting record informative about future UK monetary policy?. Scand J Econ 106: 299–314
Giacomini R, Granger CWJ (2004) Aggregation of space-time processes. J Econometrics 118: 7–26
Gibbons S, Machin S (2005) Valuing rail access using transport innovations. J Urb Econ 57: 148–169
Goyal S (2007) Connections: An Introduction to the Economics of Networks. Princeton University Press, Princeton and Oxford
Granovetter MS (1973) The strength of weak ties. Am J Sociol 78: 1360–1380
Gulliksen H (1968) Methods for determining equivalence of measures. Psychol Bull 70: 534–544
Hansen L (1982) Large sample properties of generalized method of moments estimators. Econometrica 50: 1029–1054
Hewitt E, Savage L (1955) Symmetric measures on Cartesian products. Trans Am Math Soc 80: 470–501
Holly A, Pesaran MH, Yamagata T (2010) A spatio-temporal model of house prices in the USA. J Econometrics 158: 160–173
Jennrich RI (2001) A simple general procedure for orthogonal rotation. Psychometrika 66: 289–306
Kapoor M, Kelejian HH, Prucha IR (2007) Panel data models with spatially correlated error components. J Econometrics 140: 97–130
Kelderman H (2004) Measurement exchangeability and normal one-factor models. Biometrika 91: 738–742
Kelejian HH, Prucha IR (1999) A generalized moments estimator for the autoregressive parameter in a spatial models. Int Econ Rev 40: 509–533
Kelejian HH, Prucha IR (2004) Estimation of simultaneous systems of spatially interrelated cross sectional equations. J Econometrics 118: 27–50
Kelejian HH, Prucha IR (2007) HAC estimation in a spatial framework. J Econometrics 140: 131–154
Lee L-F (2004) Asymptotic distribution of quasi-maximum likelihood estimators for spatial autoregressive models. Econometrica 72: 1899–1925
LeSage JP, Pace RK (2009) Introduction to Spatial Econometrics. Taylor & Francis, London
Newey WK (1984) A method of moments interpretation of sequential estimators. Econ Lett 14: 201–206
Orphanides A (2003) Monetary policy evaluation with noisy information. J Monet Econ 50: 605–631
Pesaran MH (2004) General diagnostic tests for cross section dependence in panels. CESifo Working Papers 1233
Pesaran MH (2006) Estimation and inference in large heterogenous panels with multifactor error structure. Econometrica 74: 967–1012
Pesaran MH, Tosetti E (2009) Large panels with spatial correlations and common factors. Revised version of Working Paper CWPE 0743, Faculty of Economics, University of Cambridge
Pesaran MH, Schuermann T, Weiner S (2004) Modelling regional interdependencies using a global error-correcting macroeconometric model. J Bus Econ Stat 22: 129–162
Pinkse J, Slade ME, Brett C (2002) Spatial price competition: a semiparametric approach. Econometrica 70: 1111–1155
Rey SJ, Montouri BD (1999) US regional income convergence: a spatial econometric perspective. Reg Stud 33: 143–156
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Bhattacharjee, A., Holly, S. Structural interactions in spatial panels. Empir Econ 40, 69–94 (2011). https://doi.org/10.1007/s00181-010-0396-1
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-010-0396-1
Keywords
- Cross-sectional and spatial dependence
- Spatial weights matrix
- Spatial interactions
- Monetary policy committee
- Generalised method of moments