Abstract
If capital is perfectly mobile between regions within countries, and regional TFPs share a common stochastic trend, the ratio of regional capital–labor ratios should remain constant over time. Spatial panel data on regional capital–labor ratios in Israel are used to test this hypothesis. Since the data are nonstationary, pairwise panel cointegration tests are applied. These tests are complicated by cross-section dependence between the spatial panel units. Although the null hypothesis of perfect capital mobility is overwhelmingly rejected, rejection of long-term perfect internal capital mobility is not overwhelming.
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