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

    Cavatorta, Elisa and Smith, Ron P. (2017) Factor models in panels with cross-sectional dependence: an application to the extended SIPRI military expenditure data. Defence and Peace Economics 28 (4), pp. 437-456. ISSN 1024-2694.

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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 panel data models of military expenditure. 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-sectional dependence, that the bulk of the effect is regional and there are large gains in fit by allowing for both dynamics and between country heterogeneity in models of the demand for military expenditures.

    Metadata

    Item Type: Article
    Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis, available online at the link above.
    Keyword(s) / Subject(s): Military expenditures, panel data, factor models
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 22 Sep 2017 15:02
    Last Modified: 18 Jul 2018 00:10
    URI: http://eprints.bbk.ac.uk/id/eprint/19781

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