Cross‐sectional Dependence and Spillovers in Space and Time: Where Spatial Econometrics and Global Var Models Meet

Abstract To enhance the measurement of economic and financial spillovers, we bring together the spatial and global vector autoregressive (GVAR) classes of econometric models by providing a detailed methodological review where they meet in terms of structure, interpretation, and estimation. We discuss the structure of connectivity (weight) matrices used by these models and its implications for estimation. To anchor our work within the dynamic literature on spillovers, we define a general yet measurable concept of spillovers. We formalize it analytically through the indirect effects used in the spatial literature and impulse responses used in the GVAR literature. Finally, we propose a practical step‐by‐step approach for applied researchers who need to account for the existence and strength of cross‐sectional dependence in the data. This approach aims to support the selection of the appropriate modeling and estimation method and of choices that represent empirical spillovers in a clear and interpretable form.