Structural interactions in spatial panels

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 -> 8, whilst the methods based on GMM and common correlated effects are appropriate when T » N -> 8. Limitations and potential enhancements of the existing methods are discussed, and several directions for new research are highlighted. © 2010 Springer-Verlag.