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

Arnab Bhattacharjee (), Jan Ditzen and Sean Holly ()

No BEMPS76, BEMPS - Bozen Economics & Management Paper Series from Faculty of Economics and Management at the Free University of Bozen

Abstract: We 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 nonstationary. 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 we propose the mean group, common corrrelated effects estimator together with multiple testing of cross-correlations to provide the short-run spatial weights. We apply this model to the 324 local authorities of England, and show that our approach is useful for modelling weak and strong cross-section dependence, together with partial adjustments to two long-run equilibrium relationships and short-run spatio-temporal dynamics, and provides exciting new insights.

Keywords: Spatio-temporal dynamics; Error Correction Models; Weak and strong cross sectional dependence (search for similar items in EconPapers)
JEL-codes: C21 C22 C23 R3 (search for similar items in EconPapers)
Pages: [26 pages]
Date: 2021-01
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-net and nep-ure
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Working Paper: Spatial and Spatio-Temporal Error Correction Networks and Common Correlated Effects (2021) Downloads
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