Panel Data Inference Under Spatial Dependence
Center for Policy Research Working Paper No. 123
38 Pages Posted: 10 Apr 2011
Date Written: March 1, 2010
This paper focuses on inference based on the usual panel data estimators of a one-way error component regression model when the true specification is a spatial error component model. Among the estimators considered, are pooled OLS, random and fixed effects, maximum likelihood under normality, etc. The spatial effects capture the cross-section dependence, and the usual panel data estimators ignore this dependence. Two popular forms of spatial autocorrelation are considered, namely, spatial auto-regressive random effects (SAR-RE) and spatial moving average random effects (SMA-RE). We show that when the spatial coefficients are large, test of hypothesis based on the usual panel data estimators that ignore spatial dependence can lead to misleading inference.
Keywords: Panel data, Hausman test, Random effect, Spatial autocorrelation, Maximum likelihood
JEL Classification: C33
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