IV Estimation of Heterogeneous Spatial Dynamic Panel Models with Interactive Effects

Chen, Jia and Cui, Guowei and Sarafidis, Vasilis and Yamagata, Takashi (2025): IV Estimation of Heterogeneous Spatial Dynamic Panel Models with Interactive Effects.

Abstract

This paper develops a Mean Group Instrumental Variables (MGIV) estimator for spatial dynamic panel data models with interactive effects, under large N and T asymptotics. Unlike existing approaches that typically impose slope-parameter homogeneity, MGIV accommodates cross-sectional heterogeneity in slope coefficients. The proposed estimator is linear, making it computationally efficient and robust. Furthermore, it avoids the incidental parameters problem, enabling asymptotically valid inferences without requiring bias correction. The Monte Carlo experiments indicate strong finite-sample performance of the MGIV estimator across various sample sizes and parameter configurations. The practical utility of the estimator is illustrated through an application to regional economic growth in Europe. By explicitly incorporating heterogeneity, our approach provides fresh insights into the determinants of regional growth, underscoring the critical roles of spatial and temporal dependencies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dynamic panel data, spatial interactions, heterogeneous slopes, interactive effects, latent common factors, instrumental variables, large N and T asymptotics.
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C55 - Large Data Sets: Modeling and Analysis; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

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