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st: Interaction terms in fixed effects model


From   Laura Brandstetter <la.brandstetter@gmail.com>
To   statalist@hsphsun2.harvard.edu
Subject   st: Interaction terms in fixed effects model
Date   Fri, 7 Sep 2012 11:45:51 +0200

Dear Statalist,

I would highly appreciate any comments on the following problem:
I have a panel dataset (6 yrs) and I use a fixed effects estimator
including year dummies. I create interaction terms between different
dummy variables and the independent variable of major interest. In
different specifications, I analyze the effect of the independent
variable, and the interaction term, but it's not possible to include
the dummy used for the interaction term for several reasons:

Specification 1: dummy1 bisects the observation period; adding the
dummy would cause a collinearity problem as year dummies are already
included
Specification 2: dummy2 is time-invariant and drops out when using fixed effects

Are these specifications still possible, even if I can't include both
variables used for the computation of the interaction term?
Unfortunately, I didn't really find a clear answer yet.

Thank you so much for your help!

Laura
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