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st: Clustered standard errors with panel-specific trends


From   Jing Xing <Jing.Xing@sbs.ox.ac.uk>
To   "statalist@hsphsun2.harvard.edu" <statalist@hsphsun2.harvard.edu>
Subject   st: Clustered standard errors with panel-specific trends
Date   Tue, 28 Aug 2012 14:05:05 +0100

Hi all,

I am trying to estimate a simple linear regression model using a panel data of around 80 countries. I included country-specific time trends in the estimations, and I also clustered the standard errors for each country. I noticed that once I cluster the standard errors, the standard errors of those country-specific linear time trends become extremely small and essentially zero. As a result, the t-statistics become very large. I find these results suspicious and puzzling. If I only calculate the robust (but non-clustered) standard errors on these trends, I obtain reasonable standard errors. Can anyone suggest me why this is the case? Should I cluster the standard errors if I include country-specific time trends in the model?

Thank you very much.

Best wishes,
Cindy Xing

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