Spatial and Spatio-Temporal Error Correction, Networks and Common Correlated Effects

Arnab Bhattacharjee, Jan Ditzen and Sean Holly

A chapter in Essays in Honor of M. Hashem Pesaran: Panel Modeling, Micro Applications, and Econometric Methodology, 2022, vol. 43B, pp 37-60 from Emerald Group Publishing Limited

Abstract: The authors provide a way to represent spatial and temporal equilibria in terms of error correction models in a panel setting. This requires potentially two different processes for spatial or network dynamics, both of which can be expressed in terms of spatial weights matrices. The first captures strong cross-sectional dependence, so that a spatial difference, suitably defined, is weakly cross-section dependent (granular) but can be non-stationary. The second is a conventional weights matrix that captures short-run spatio-temporal dynamics as stationary and granular processes. In large samples, cross-section averages serve the first purpose and the authors propose the mean group, common correlated effects estimator together with multiple testing of cross-correlations to provide the short-run spatial weights. The authors apply this model to the 324 local authorities of England, and show that our approach is useful for modeling weak and strong cross-section dependence, together with partial adjustments to two long-run equilibrium relationships and short-run spatio-temporal dynamics. This exercise provides new insights on the (spatial) long-run relationship between house prices and income in the UK.

Keywords: Spatio-temporal dynamics; error correction models; weak and strong cross-sectional dependence; house prices in England; unknown spatial weight matrices; common correlated effects estimator; C21; C22; C23; R3 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Spatial and Spatio-temporal Error Correction, Networks and Common Correlated Effects (2021)
Working Paper: Spatial and Spatio-Temporal Error Correction Networks and Common Correlated Effects (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-90532021000043b003

DOI: 10.1108/S0731-90532021000043B003

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