Estimation and inference in heterogeneous spatial panels with a multifactor error structure

Chen, J., Shin, Y. and Zheng, C. (2022) Estimation and inference in heterogeneous spatial panels with a multifactor error structure. Journal of Econometrics, 229 (1). pp. 55-79. ISSN 0304-4076 doi: 10.1016/j.jeconom.2021.05.003

Abstract/Summary

We develop a unifying econometric framework for the analysis of heterogeneous panel data models that can account for both spatial dependence and common factors. To tackle the challenging issues of endogeneity due to the spatial lagged term and the correlation between the regressors and factors, we propose the CCEX-IV estimation procedure that approximates factors by the cross-section averages of regressors and deals with the spatial endogeneity using the internal instrumental variables. We develop the individual and Mean Group estimators, and establish their consistency and asymptotic normality. By contrast, the Pooled estimator is shown to be inconsistent in the presence of parameter heterogeneity. Monte Carlo simulations confirm that the finite sample performance of the proposed estimators is quite satisfactory. We demonstrate the usefulness of our approach with an application to the house price growth for Local Authority Districts in the UK over 1997Q1–2016Q4.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/107078
Identification Number/DOI	10.1016/j.jeconom.2021.05.003
Refereed	Yes
Divisions	No Reading authors. Back catalogue items Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
Publisher	Elsevier
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