Within and Between Panel Cointegration in the German Regional Output-Trade-FDI Nexus

For spatial data with a sufficiently long time dimension, the concept of global cointegration has been recently included in the econometrics research agenda. Global cointegration arises when non-stationary time series are cointegrated both within and between spatial units. In this paper, we analyze the role of globally cointegrated variable relationships using German regional data (NUTS 1 level) for GDP, trade, and FDI activity during the period 1976-2005. Applying various homogeneous and heterogeneous panel data estimators to a Spatial Panel Error Correction Model (SpECM) for regional output growth allows us to analyze the short- and long-run impacts of internationalization activities. For the long-run cointegration equation, the empirical results support the hypothesis of export- and FDI-led growth. We also show that for export and outward FDI activity positive cross-regional effects are at work. Likewise, in the short-run SpECM specification, direct and indirect spatial externalities are found to be present. As a sensitivity analysis, we use a spatial weighting matrix based on interregional goods transport flows rather than geographical distances. This scheme thus allows us to address more soundly the role of positive and negative effects of trade/FDI on output activity for a system of interconnected regions.

How have global shocks impacted the real effective exchange rates of individual euro area countries since the euro's creation?

This paper uncovers the response pattern to global shocks of euro area countries' real effective exchange rates before and after the start of Economic and Monetary Union (EMU), a largely open ended question when the euro was created. We apply to that end a newly developed methodology based on high dimensional VAR theory. This approach features a dominant unit to a large set of over 60 countries' real effective exchange rates and is based on the comparison of two estimated systems: one before and one after EMU. We find strong evidence that the pattern of responses depends crucially on the nature of global shocks. In particular, post-EMU responses to global US dollar shocks have become similar to Germany's response before EMU, i.e. to that of the economy that used to issue Europe's most credible legacy currency. By contrast, post-EMU responses of euro area countries to global risk aversion shocks have become similar to those of Italy, Portugal or Spain before EMU, i.e. of economies of the euro area's periphery. Our findings also suggest that the divergence in external competitiveness among euro area countries over the last decade, which is at the core of today's debate on the future of the euro area, is more likely due to country-specific shocks than to global shocks.Euro, Real Effective Exchange Rates, Weak and Strong Cross Sectional Dependence, High-Dimensional VAR, Identification of Shocks.

Within and Between Panel Cointegration in the German Regional Output-Trade-FDI Nexus

For spatial data with a sufficiently long time dimension, the concept of global cointegration has been recently included in the econometrics research agenda. Global cointegration arises when non-stationary time series are cointegrated both within and between spatial units. In this paper, we analyze the role of globally cointegrated variable relationships using German regional data (NUTS 1 level) for GDP, trade, and FDI activity during the period 1976–2005. Applying various homogeneous and heterogeneous panel data estimators to a Spatial Panel Error Correction Model (SpECM) for regional output growth allows us to analyze the short- and long-run impacts of internationalization activities. For the long-run cointegration equation, the empirical results support the hypothesis of export- and FDI-led growth. We also show that for export and outward FDI activity positive cross-regional eff ects are at work. Likewise, in the short-run SpECM specification, direct and indirect spatial externalities are found to be present. As a sensitivity analysis, we use a spatial weighting matrix based on interregional goods transport fl ows rather than geographical distances. This scheme thus allows us to address more soundly the role of positive and negative effects of trade/FDI on output activity for a system of interconnected regions.Cointegration; Spatial Durbin model; growth; trade; FDI

Spatial and Temporal Diffusion of House Prices in the UK

This paper provides a method for the analysis of the spatial and temporal diffusion of shocks in a dynamic system. We use changes in real house prices within the UK economy at the level of regions to illustrate its use. Adjustment to shocks involves both a region specific and a spatial effect. Shocks to a dominant region – London – are propagated contemporaneously and spatially to other regions. They in turn impact on other regions with a delay. We allow for lagged effects to echo back to the dominant region. London in turn is influenced by international developments through its link to New York and other financial centers. It is shown that New York house prices have a direct effect on London house prices. We analyse the effect of shocks using generalised spatio-temporal impulse responses. These highlight the diffusion of shocks both over time (as with the conventional impulse responses) and over space.spatial dependence, cross sectional dependence, house prices

Do house prices overreact to relevant information? New evidence from the UK housing market

We use recent panel data and various empirical models to investigate the validity of the irrational expectations hypothesis and the feedback theory in the UK housing market. We provide the first empirical evidence to justify the statistically significant and positive feedback causality effect between the changes in bubbles and the contemporaneous changes in house prices. While we have found evidence to support the idea that the irrational expectation hypothesis best fits the UK housing market in the short-run, we failed to find evidence in support of the feedback theory. We observe that an increase in bubbles could cause a subsequent decrease in house prices, ceteris paribus, suggesting that people also learn from their mistakes and attempt to compromise by acting as rationally as possible. Overall, we observe that the causality effects are asymmetrical, being more significant from bubble to house price than they are from house price to bubble

Spatial and Temporal Diffusion of House Prices in the UK

This paper provides a method for the analysis of the spatial and temporal diffusion of shocks in a dynamic system. We use changes in real house prices within the UK economy at the level of regions to illustrate its use. Adjustment to shocks involves both a region specific and a spatial effect. Shocks to a dominant region - London - are propagated contemporaneously and spatially to other regions. They in turn impact on other regions with a delay. We allow for lagged effects to echo back to the dominant region. London in turn is influenced by international developments through its link to New York and other financial centers. It is shown that New York house prices have a direct effect on London house prices. We analyse the effect of shocks using generalised spatio-temporal impulse responses. These highlight the diffusion of shocks both over time (as with the conventional impulse responses) and over space.House Prices, Cross Sectional Dependence, Spatial Dependence

Spatial and Spatio-temporal Engle-Granger representations, Networks and Common Correlated Effects

We provide a way of representing spatial and temporal equilibria in terms of a Engle-Granger representation theorem in a panel setting. We use the mean group, common correlated effects estimator plus multiple testing to provide a set of weakly cross corr

Banking Geography and Cross-Fertilization in the Productivity Growth of US Commercial Banks

The US banking industry offers a unique, natural and fertile environment to study geography's effects on banks' behavior and performance. The literature on banks' operating performance, while extensive, says little about the influence of spatial interactions on banks' performance. We compute and examine, using a physical distance-based spatio-temporal empirical model, the state-wide total factor productivity growth (TFPG) indices of US commercial banks for each state for the 1971-1995 period. We observe that the productivity growth of commercial banks in state i depends strongly, positively, and contemporaneously on the productivity growth of commercial banks located in state i's contiguous states. Further, “regulatory space” appears to induce frictions and lessen the documented spatial interactions. These findings support our plea that research on commercial banking sector's behavior need to pay a particular attention to the effects of banking geography.Spatial, Commercial Banks, Total Factor Productivity Growth, Kalman Filter

Generalized Yule-Walker Estimation for Spatio-Temporal Models with Unknown Diagonal Coefficients

We consider a class of spatio-temporal models which extend popular econometric spatial autoregressive panel data models by allowing the scalar coefficients for each location (or panel) different from each other. To overcome the innate endogeneity, we propose a generalized Yule-Walker estimation method which applies the least squares estimation to a Yule-Walker equation. The asymptotic theory is developed under the setting that both the sample size and the number of locations (or panels) tend to infinity under a general setting for stationary and alpha-mixing processes, which includes spatial autoregressive panel data models driven by i.i.d. innovations as special cases. The proposed methods are illustrated using both simulated and real data