Spatial error correction and cointegration in nonstationary panel data: regional house prices in Israel

We “spatialize” residual-based panel cointegration tests for nonstationary spatial panel data in terms of a spatial error correction model (SpECM). Local panel cointegration arises when the data are cointegrated within spatial units but not between them. Spatial panel cointegration arises when the data are cointegrated through spatial lags between spatial units but not within them. Global panel cointegration arises when the data are cointegrated both within and between spatial units. Spatial error correction arises when error correction occurs within and between spatial units. We use nonstationary spatial panel data on the housing market in Israel to illustrate the methodology. We show that regional house prices in Israel are globally cointegrated in the long run and there is evidence of spatial error correction in the short run.