Forecasting with Spatial Panel Data - IZA.pdf

Forecasting with Spatial Panel Data a,∗ b b,c Badi H. Baltagi , Georges Bresson , Alain Pirotte aDepartment of Economics and Center for Policy Research 426 Eggers Hall, SyracuseUniversity, Syracuse, NY 13244-1020, USA b ERMES (CNRS), Université Panthéon-Assas Paris II, 12 place du Panthéon, 75230 Paris Cedex 05, France cINRETS-DEST , 2 avenue du général Malleret-Joinville, BP 34, 94114 Arcueil Cedex, France October 2008 Abstract This paper compares various forecasts using panel data with spatial error correla- tion. The true data generating process is assumed to be a simple error component regression model with spatial remainder disturbances of the autoregressive or mov- ing average type. The best linear unbiased predictor is compared with other fore- casts ignoring spatial correlation, or ignoring heterogeneity due to the individual effects, using Monte Carlo experiments. In addition, we check the performance of these forecasts under misspecification of the spatial error process, various spatial weight matrices, and heterogeneous rather than homogeneous panel data models. Keywords: Forecasting; BLUP; Panel Data; Spatial Dependence; Heterogeneity. JEL classification: C33. ∗Corresponding author. Tel.: + 1 315 443 1630; Fax: + 1 315 443 1081. E-mail: bbaltagi@ (B.H. Baltagi), bresson01@ (G. Bresson), apirot- te@ (A. Pirotte). This paper was presented at a conference in honor of Phoebus Dhrymes in Paphos, Cyprus, June 1-3, 2007. Also, at the 14th International Conference on Panel Data at the Wang Yanan Institute for Studies in Economics (WISE), Xiamen University, China, July 16-18, 2007, and the 63rd European Meeting of the Econometric So