Cross-sectional dependence model specifications in a static trade panel data setting

James P. LeSage, Manfred M. Fischer

Publication: Working/Discussion PaperWU Working Paper

Abstract

The focus is on cross-sectional dependence in panel trade flow models. We propose alternative specifications for modeling time invariant factors such as socio-cultural indicator variables, e.g., common language and currency. These are typically treated as a source of heterogeneity eliminated using fixed effects transformations, but we find evidence of cross-sectional dependence after eliminating country-specific effects. These findings suggest use of alternative simultaneous dependence model specifications that accommodate cross-sectional dependence, which we set forth along with Bayesian estimation methods. Ignoring cross-sectional dependence implies biased estimates from panel trade flow models that rely on fixed effects.
Original languageEnglish
Publication statusPublished - 2017

Publication series

NameWorking Papers in Regional Science
No.2017/01

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 507026 Economic geography
  • 502025 Econometrics
  • 507016 Regional economy

WU Working Paper Series

  • Working Papers in Regional Science

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