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    Factor models in panels with cross-sectional dependence: an application to the extended SIPRI military expenditure data

    Smith, Ron P. and Cavatorta, Elisa (2016) Factor models in panels with cross-sectional dependence: an application to the extended SIPRI military expenditure data. Working Paper. Birkbeck College, University of London, London, UK.

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    Abstract

    Strategic interactions between countries, such as arms races, alliances and wider economic and political shocks, can induce strong cross-sectional dependence in models of military expenditures using panel data. If the assumption of cross-sectional independence fails, standard panel estimators such as fixed or random effects can lead to misleading inference. This paper shows how to improve estimation of dynamic, heterogenous, panel models of the demand for military expenditure allowing for cross-sectional dependence in errors using two approaches: Principal Components and Common Correlated Effect estimators. Our results show that it is crucial to allow for cross-section dependence and there are large gains in it by allowing for both dynamics and between country heterogeneity in demand models of military expenditures. Our estimates show that mean group estimation of error correction models using the Common Correlated Effect approach provides an effective modelling framework.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: ISSN 1745-8587: BWPEF 1602
    Keyword(s) / Subject(s): Military expenditure, Panel data, Factor models
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 20 May 2016 08:40
    Last Modified: 22 May 2017 12:55
    URI: http://eprints.bbk.ac.uk/id/eprint/15262

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