The presence of cross-sectionally correlated error terms invalidates much inferential theory of panel data models. Recent work by Pesaran (2006) suggests a method which makes use of cross-sectional averages to provide valid inference for stationary panel regressions with multifactor error...

This paper considers alternative approaches to the analysis of large panel data models in the presence of error cross section dependence. A popular method for modelling such dependence uses a factor error structure. Such models raise new problems for estimation and inference. This paper compares...