Dear List,
I'm working with state panel data for roughly 30 years and estimating a
fixed-effects model with a lagged dependent variable on the right-hand
side to address autocorrelation. Several colleagues have informed me
that including a lagged dependent variables on the RHS when utilizing a
fixed-effects model is simply a no-no, i.e. such estimations yield
inconsistent estimates. My question is whether the inconsistency dies
away as the number of time-periods goes off to infinity? If so, are
there any rules of thumb as to how many time periods are needed to
mitigate the problems described above. A reference would be much
appreciated. If the estimates are inconsistent regardless of the number
of time-periods, can someone offer an alternative approach to correcting
for autocorrelation when using a fixed-effects model? Would cluster
robust standard errors do the trick? Thanks in advance.
Best,
Tom
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