Bhattacharjee, A. and Holly, S.
Structural interactions in spatial panels
Empirical Economics
Abstract: Until recently, considerable effort has been devoted to the estimation of panel data regression models without adequate attention being paid to the drivers of interaction amongst cross-section and spatial units. We discuss some new methodologies in this emerging area and demonstrate their use in measurement and inferences on cross-section and spatial interactions. Specifically, we highlight the important distinction between spatial dependence driven by unobserved common factors and those based on a spatial weights matrix. We argue that purely factor-driven models of spatial dependence may be inadequate because of their connection with the exchangeability assumption. The three methods considered are appropriate for different asymptotic settings; estimation under structural constraints when N is fixed and T → ∞, whilst the methods based on GMM and common correlated effects are appropriate when T ≫ N → ∞. Limitations and potential enhancements of the existing methods are discussed, and several directions for new research are highlighted.
JEL Codes: E42, E43, E50, E58
Author links: Sean Holly
Publisher's Link: http://link.springer.com/article/10.1007/s00181-010-0396-1 
