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Re: st: Use of Fixed Effects with State and National Data


From   "Justina Fischer" <JAVFischer@gmx.de>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: Use of Fixed Effects with State and National Data
Date   Wed, 28 Dec 2011 00:52:11 +0100

Hi Samuel,

my short advice is:
better include year effects, or at least a common time trend.

Estimating a model without that - you need to justify.

You can also estimate state-specific time trends to account for different developments over time across states.

Best regards

Justina
-------- Original-Nachricht --------
> Datum: Tue, 27 Dec 2011 17:07:34 -0600
> Von: Samuel Finkelstein <s.finkelstein73@gmail.com>
> An: statalist@hsphsun2.harvard.edu
> Betreff: st: Use of Fixed Effects with State and National Data

> Hi everyone,
> 
> I am in the process of working with a data set that includes both
> yearly state-level independent variables as well as yearly
> national-level independent variables, while the dependent variable is
> a state-specific variable.  I have received mixed feedback regarding
> whether or not the use of yearly fixed effects is appropriate.  The
> model I have been estimating is:
> 
> State-specific demand i,t  = state-specific control variables i,t +
> national-level control variable t + e
> 
> where the national-level control variable is the rate on various
> T-bills and bonds, ranging from 3 months to 20 years, or inflation.
> Each model I estimate includes 5 state-level variables and only one
> national-level (interest rate or inflation) variable.  The state-level
> and national-level variables all vary by time, but the state-level
> variables also vary by state.
> 
> In each model, I have included state-specific fixed effects.  However,
> I am trying to determine whether or not the inclusion of a time
> (yearly) fixed effect is also appropriate.  When I estimate my models
> using yearly fixed-effects, the coefficients on the state-level
> variables do not change across the different models and the r-squared
> does not change across models.  When I estimate my models when
> excluding yearly fixed effects, the r-squared varies across the models
> and the coefficients on the state-level variables also vary across the
> different models.  I am inclined to go with that particular set of
> models (excluding the yearly fixed effects), but I have been warned by
> some that by excluding yearly fixed effects, the national-level
> interest rate variable is picking up variation that should be picked
> up by time fixed effects.  In other words, the national-level
> variables are replacing the excluded year fixed effects and I cannot
> then make any valuable interpretation of the national-level variable
> (i.e., how do interest rates relate to demand).  Below are my results
> (all non-interest variables vary by year and state, interest variables
> only vary by year and not by state since they are national variables):
> 
> 3 month interest rate with year and state FE
>                          coeff.         std. error
> 3monthinterest|   .0937955   .0299048
> unemploy |   .0003255   .0233223
> income |  -3.74e-06   .0000128
> age |   .0292728   .0448224
> newbuy |   .4022719   .3591874
> homes|   .0254584   .0107563
> r2 = 0.6689
> 
> 20 year interest rate with year and state FE
>                         coeff.        std. error
> 20yrinterest|   .1819766   .0580196
> unemploy |   .0003255   .0233223
> income |  -3.74e-06   .0000128
> age |   .0292728   .0448224
> newbuy |   .4022719   .3591874
> homes |   .0254584   .0107563
> r2 = 0.6689
> 
> Below are the results when including state fixed effects without year
> fixed effects:
> 
> 3 month interest rate with state FE only
>                               coeff.      std. error
> 3monthinterest |    .141143    .015493
> unemploy |   .0073605   .0220101
> income |  -.0000461   8.91e-06
> age |   .0342493   .0515669
> newbuy |   1.801027   .4193282
> homes|   .0244424   .0118203
> r2 = 0.5306
> 
> 20 year interest rate with state FE only
>                         coeff.         std. error
> 20yrinterest|   .2815332   .0498411
> unemploy |  -.0621116   .0218478
> income|  -.0000226    .000013
> age |   .0785964   .0519008
> newbuy|   .9568831   .3819117
> homes|   .0156787   .0123501
> r2 = 0.4906
> 
> For what it is worth, I have also re-estimated the models excluding
> the year fixed effects and including additional national-level
> variables (such as annualized market return) along with the interest
> rate variable and the result on the interest rate variable is similar
> to the version without the annualized market return variable, while
> the annualized market return variable is insignificant.
> 
> So, my question is: Is it appropriate or inappropriate to include year
> fixed effects given that I am including a variable that varies by year
> but does not vary by state within a given year (i.e., the interest
> rate variable)?
> 
> If you have any thoughts regarding this issue I would greatly
> appreciate it, as I have received mixed feedback and I haven't found a
> study that explicitly deals with this particular issue.
> 
> Any assistance would be greatly appreciated.
> 
> Respectfully,
> 
> Samuel Finkelstein
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-- 
Justina AV Fischer, PhD
COFIT Fellow
World Trade Institute
University of Bern

homepage: http://www.justinaavfischer.de/
e-mail: javfischer@gmx.de. justina.fischer@wti.org
papers: http://ideas.repec.org/e/pfi55.html


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