A correlated random effects spatial Durbin model

Abstract

We consider a correlated random effects specification of the spatial Durbin (dynamic) panel model with an error-term containing individual effects and their spatial spillovers. We derive the likelihood function of the model and the asymptotic properties of the quasimaximum likelihood estimator. We also provide illustrative evidence from a growth-initial level equation and the country dataset analysed by Lee and Yu (2016). While largely replicating their estimates, our results indicate the existence of spatial contagion in the individual effects. In particular, estimated spill-in/out effects reveal the existence of groups of countries with common patterns in their spillovers. Keywords: correlated random effects, Durbin model, spatial dynamic panel data. JEL Classification: C23