I am working with a panel of European regions where N=177 and T=10, and estimate a dynamic panel model explaining employment growth in region i as a function of that region's previous employment growth and other variables. The model to be estimated is:
EG(t+1) = aEG(t) + bEG(t)*X(t) + cEG(t)*Y(t) + dEG(t)*X(t)*Y(t) + Z(t) + error terms
where:
EG = employment growth in region i
X, Y, Z = other variables related to region i
a, b, c, d = parameters
Given the dynamic panel, I use Arellano-Bond estimator (AB).
However, from my understanding of AB, the error term is assumed to be uncorrelated across regions.
This cannot be ruled out in my case: it is likely that shocks in a region affect neighboring regions in the same
country, though perhaps not regions located in other member states. Is there a way to control for this issue within Stata (9.0)? Is anyone using an alternative approach for this type of problem? Your comments are much appreciated. Thanks in advance
max
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