The dynamic general nesting spatial econometric model for spatial panels with common factors: Further raising the bar.

Abstract

The dynamic general nesting spatial econometric model for spatial panels with common factors is the most advanced model currently available. It accounts for local spatial dependence by means of an endogenous spatial lag, exogenous spatial lags, and a spatial lag in the error term. It accounts for dynamic effects by means of the dependent variable lagged in time, and the dependent variable lagged in both space and time. Finally, it accounts for global cross-sectional dependence by means of cross-sectional averages or principal components with heterogeneous coefficients, which generalizes the traditional controls for time-invariant and spatial-invariant variables by unit-specific and time-specific effects. This paper provides an overview of the main arguments in favor of each of these model components, as well as some potential pitfalls.