Spatial panel models

This paper provides a survey of the existing literature on spatial panel data models. Both static and dynamic models will be considered. The paper also demonstrates that spatial econometric models that include lags of the dependent variable and of the independent variables in both space and time provide a useful tool to quantify the magnitude of direct and indirect effects, both in the short term and in long term. Direct effects can be used to test the hypothesis as to whether a particular variable has a significant effect on the dependent variable in its own economy, and indirect effects to test the hypothesis whether spatial spillovers exist. To illustrate these models and their effects estimates, a demand model for cigarettes is estimated based on panel data from 46 U.S. states over the period 1963 to 1992.