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st: re: Re: Panel data and lagged dep variable


From   Christopher Baum <kit.baum@bc.edu>
To   <statalist@hsphsun2.harvard.edu>
Subject   st: re: Re: Panel data and lagged dep variable
Date   Sat, 25 Sep 2010 14:59:09 -0400

<>
Hi Kit, thank you very much for letting me understand LDV much better and
deeper.
As you mentioned, the prupose of involving LDV is to account the subsequent
influence of change in Xs. You also indicate we should include time dummies
to in favor of LDV. My understanding of time dummies is to absorb
time-specific changes (e.g shocks). i understand LDV and time dummies should
be consistent, but exactely in what extant, the time dummies and LDV are
consitent in the regression?


If there are significant time-specific common factors (e.g., business cycle factors) appearing in the response variable, 
then by omitting time dummies you are misspecifying the model, and estimates of any coefficients (including
the coefficient of the LDV) are likely to be biased and inconsistent. Include the dummies, do an F-test for their
joint significance, and if you don't need them, out they go. But determining whether a static or dynamic model
is needed should be performed in the context of a well-specified model.

Kit
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