Large Panels with Common Factors and Spatial Correlations

Mohammad Pesaran and Elisa Tosetti

No 3032, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper considers the statistical analysis of large panel data sets where even after conditioning on common observed effects the cross section units might remain dependently distributed. This could arise when the cross section units are subject to unobserved common effects and/or if there are spill over effects due to spatial or other forms of local dependencies. The paper provides an overview of the literature on cross section dependence, introduces the concepts of time-specific weak and strong cross section dependence and shows that the commonly used spatial models are examples of weak cross section dependence. It is then established that the Common Correlated Effects (CCE) estimator of panel data model with a multifactor error structure, recently advanced by Pesaran (2006), continues to provide consistent estimates of the slope coefficient, even in the presence of spatial error processes. Small sample properties of the CCE estimator under various patterns of cross section dependence, including spatial forms, are investigated by Monte Carlo experiments. Results show that the CCE approach works well in the presence of weak and/or strong cross sectionally correlated errors. We also explore the role of certain characteristics of spatial processes in determining the performance of CCE estimators, such as the form and intensity of spatial dependence, and the sparseness of the spatial weight matrix.

Keywords: panels; strong and weak cross section dependence; common correlated effects (search for similar items in EconPapers)
JEL-codes: C14 D13 D91 L14 O12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2007-09
New Economics Papers: this item is included in nep-geo
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Citations: View citations in EconPapers (48)

Published - published in: Journal of Econometrics, 2011, 161 (2), 182-202

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Related works:
Journal Article: Large panels with common factors and spatial correlation (2011)
Working Paper: Large panels with common factors and spatial correlation (2011)
Working Paper: Large Panels with Common Factors and Spatial Correlations (2007)
Working Paper: Large Panels with Common Factors and Spatial Correlations (2007)
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