This paper considers the problem of testing cross-sectional correlation in large panel data models with serially …-correlated errors. It finds that existing tests for cross-sectional correlation encounter size distortions with serial correlation in … account for serial correlation of an unknown form in the error term. We derive the limiting distribution of this test as (N …

-section correlation. Monte Carlo simulations show that there can be considerable size distortions in panel unit root tests when the true … specification exhibits spatial error correlation. These tests are applied to a panel data set on net real income from the 1000 …