3.4 Cross-sectional dependence and slope heterogeneity tests

As interdependence increases, panels may have significant cross-sectional dependence (CSD), so more stringent tests are needed to examine for cross-sectional dependence across countries. Thus, the current study explicitly examines cross-sectional correlation tests to address issues with panel data estimation and to ensure that empirical estimates are unbiased, consistent, and valid. Primarily Pesaran CSD, Pesaran scaled LM, bias-corrected scaled LM and Breush-Pegan LM test introduced by [105–108], expressed by the following Eqs (9&10), respectively.

where the symbols T and N replicate the sample size (period) and panel size (cross-section), respectively. It turns out that panel datasets with cross-sectional dependencies will be more prominently used in second-generation panel data techniques. More appropriate steady-state results can be established using second-generation panel stationary testing.