Semi-Parametric Spatial Auto-Covariance Models of Regional Growth Behaviour in Europe

We propose a semi-parametric spatial auto-covariance specification of the growth model to examine the growth behaviour of European regions in the period 1988-2000. This specification simultaneously takes account of the problems of non-linearities and spatial dependence. We obtain two main results. First, there is a trade-off between the identification of non-linearities and the estimation of the spatial parameters. Second, even controlling for the spatial dependence, there is evidence of a strong non-linearity between regional growth and unemployment rates. The relation between these two variable is negative but not globally linear: regions with an unemployment rate over a certain threshold appear to be 'locked' within an 'underdevelopment trap' with similar lower growth rates