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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 > * > * For searches and help try: > * http://www.stata.com/help.cgi?search > * http://www.stata.com/support/statalist/faq > * http://www.ats.ucla.edu/stat/stata/ -- 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 * * For searches and help try: * http://www.stata.com/help.cgi?search * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/

**Follow-Ups**:**st: Table of graphs with common legend***From:*B Villena <benjaminvillena@hotmail.com>

**References**:**st: Use of Fixed Effects with State and National Data***From:*Samuel Finkelstein <s.finkelstein73@gmail.com>

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