Weak and Strong Cross-Sectional Dependence: a Panel Data Analysis of International Technology Diffusion

Musolesi, Antonio; Ertur, Cem

Weak and Strong Cross-Sectional Dependence: a Panel Data Analysis of International Technology Diffusion

No 2016035, Working Papers from University of Ferrara, Department of Economics

Abstract: This paper provides an econometric examination of technological knowledge spillovers among countries by focusing on the issue of error cross-sectional dependence, particularly on the dif- ferent ways â€“ weak and strong â€“ that this dependence may affect model specification and estimation. A preliminary analysis based on estimation of the exponent of cross-sectional de- pendence provides a clear result in favor of strong cross-sectional dependence. This result has relevant implications in terms of econometric modeling and suggests that a factor structure is preferable to a spatial error model. The common correlated effects approach is then used be- cause it remains valid in a variety of situations that are likely to occur, such as the presence of both forms of dependence or the existence of nonstationary factors. According to the estimation results, richer countries benefit more from domestic R&D and geographic spillovers than poorer countries, while smaller countries benefit more from spillovers originating from trade. The re- sults also suggest that when the problem of (possibly many) correlated unobserved factors is addressed, the quantity of education no longer has a significant effect. Finally, a comparison of the results with those obtained from a spatial model provides interesting insights into the bias that may arise when we allow only for weak dependence, despite the presence of strong dependence in the data.

Keywords: cross-sectional dependence; large panels; factor models; spatial models; heterogeneous slopes; unit root; total factor productivity; research and development; human capital (search for similar items in EconPapers)
JEL-codes: C23 C5 F0 O3 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2016-05-09
New Economics Papers: this item is included in nep-eff, nep-geo, nep-ino, nep-pr~ and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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