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st: xtreg, fe with cluster option.

From   natasha agarwal <>
Subject   st: xtreg, fe with cluster option.
Date   Fri, 2 Jul 2010 10:04:58 +0100

Dear Everyone,

I am trying to estimate an augmented production function where am
attempting to measure the effect of aggregate variable (FDI in a
region) on micro units (productivity of domestic firms). I use an
unbalanced panel data which spans for 5 years and estimate the same
using a within estimator.

I wanted to know that when I give xtreg, fe vce(cluster region)
command, does the cluster option take care of the serial correlation
in the errors as well as the Moulton (1990) problem? Does the cluster
option also take care if the number of clusters are as small as 10?

Moulton (1990) ; "An illustration of a pitfall in estimating the
effects of aggregate variables on micro units"; The Review of
Economics and Statistics, 72(2), 334-338

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