| ID | 153087 |
| Title Proper | Factor models in panels with cross-sectional dependence |
| Other Title Information | an application to the extended Sipri military expenditure data |
| Language | ENG |
| Author | Smith, Ron P ; Cavatorta, Elisa |
| Summary / Abstract (Note) | 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. |
| `In' analytical Note | Defence and Peace Economics Vol. 28, No.4; Aug 2017: p.437-456 |
| Journal Source | Defence and Peace Economics Vol: 28 No 4 |
| Key Words | Military Expenditures ; Panel Data ; Factor Models |