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

Badi Baltagi () and Dong Li

No 84, Center for Policy Research Working Papers from Center for Policy Research, Maxwell School, Syracuse University

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.

Keywords: prediction; spatial correlation; panel data; liquor demand (search for similar items in EconPapers)
JEL-codes: C21 C23 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-for, nep-geo and nep-lab
Date: 2006-07
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