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 Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Research Centres and Institutes: | Innovation Management Research, Birkbeck Centre for |
| Depositing User: | Administrator |
| Date Deposited: | 20 May 2016 08:40 |
| Last Modified: | 02 Aug 2023 17:24 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/15262 |
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