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I am running a fixed effects model and included time effects.

For the cross sectional dependence test I am using the Pesaran CD test.

However, I am not sure if I have to perform the test for cross-sectional dependence on the model with time effects or without time effects.

pcdtest(fixed.effects, test=c("cd") <- the test without time effects (p-value = 4.332e-14)

pcdtest(time.fixed.effects, test=c("cd") <- the test with time effects (p-value = 0.2674)

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Time effects is an easy and efficient way to reduce cross-sectional dependence as your results show. Now, if the addition of time effects into your model, can be explained theoretically, then you could add them and thus use the model with time fixed effects included.

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